Presentation of fema case study oct 2016 21.10.2016

22nd Oct 2016 P. P. Shah & Asso. 1
CTC’S BASIC INTENSIVE
STUDY COURSE ON FEMA
Case Studies
Presented by:
Mr. Paresh P. Shah
P.P. Shah & Associates
Chartered Accountants
Email: ppshahandassociates.com

Overview
 Foreign Exchange Management Act – Overview
 Fundamentals of FEMA
 FEMA Practice
 FEMA – Case studies
 Abbreviations :Authorised Dealer(AD),
Capital Account transaction (CAP),
Current Account Transaction(CAT),
Foreign Exchange(FE),
Government of India (GOI) ,
Notification no.(Notf.),
Person Resident Outside India(PROI),
Person Resident in India (PRII),
Reserve Bank of India (RBI),
Non repatriable basis (NRB)
Repatriable basis(RB)
Subject to (SBT)

22nd Oct 2016 P. P. Shah & Asso.
3
Overview of Foreign Exchange
Management Act
 Applies to whole of India and all branches, offices and agencies outside India, which are
owned or controlled by person resident in India – Extra territorial jurisdiction
 Broadly, the objectives of FEMA are: (i) To facilitate external trade and payments; and (ii)
To promote the orderly development and maintenance of foreign exchange market. The
Act has assigned an important role to the RBI in the administration of FEMA.
 FEMA has total 49 sections in which sections 1 to 9 are substantive and the rest are
procedural /administrative to carry out function such as Appellate, Investigation, search
and authorization to various statutory bodies to make rules, regulations, amendments
 Section 46 of the Act grants power to Central Government to makes rules and section 47
(as amended by Finance Act, 2015) of the Act grants power to RBI to make regulations to
implements its provisions and the rules made there under; also provides that earlier
regulations made by RBI, for which power now vests with Central Govt. remain valid until
amended / rescinded by Central Govt.
 Every Rule and Regulation made under this Act shall be laid before each house of
parliament Section 48.
 Section 49 deals with Repeal and savings
 Finance Act, 2015 has amended Sections 2, 6, 13, 18, 46 & 47 and inserted
new Section 37A

Management Act
Section Description
1 Application and commencement of FEMA w.e.f. 1/6/2000
2 Definitions (amended by Finance Act, 2015 to include “Authorised Officer”
and “Competent Authority”)
3 to 9 Substantive provisions, Dealing in FE, No drawal of FE, CAT, CAP, Export &
Import, Repatriation, Possession of FE etc. (Section 6 amended by Finance
Act, 2015 to provide that equity flows shall be under Central Govt.)
10 to 12 Authorized person
Delegation of power by RBI ,ADs & Documents
13 to 15 Contraventions and penalties (Section 13 amended by Finance Act, 2015 for
penalty for holding foreign exchange, security or property in excess of
threshold specified in new S. 37A)
16 to 38 Adjudication, Appeal and Directorate of enforcement [new Section 37A vide
Finance Act, 2015: Special provisions relating to assets held outside India in
contravention of section 4]
39 to 49 Miscellaneous provisions, Power of RBI, Power of Government of India,
Procedure for issue of Notification etc. Sunset clause for FERA upto 31st
May 2002, Repeal and Savings

Management Act
Section Description
3 Dealing in foreign exchange by any Person in India. Receipt by
PRII without Remittance, Payment in India by PRII with a right
O/I
4 Holding of foreign exchange, Security and Immovable property
by PRII.
5 Current account transactions, List and Restrictions
6 Capital account transactions-Powers of RBI, Central Govt. and
the list.
7 Export of goods and services- Declaration, Information,
Direction to receive FE.
8 Realisation and repatriation of foreign exchange
9 Exemption from realization and repatriation in certain cases
And possession of FE

Section 6 of FEMA - amendments by Finance Act, 2015
 (1) Subject to the provisions of sub-section (2), any person may sell or draw foreign exchange to
or from an authorized person for a capital account transaction.
 (2) The Reserve Bank may, in consultation with the Central Government, specify—
(a) any class or classes of capital account transactions which are permissible; any class or
classes of capital account transactions, involving debt instruments, which are permissible;
(b) the limit up to which foreign exchanges shall be admissible for such transactions:
(c) any conditions which may be placed on such transaction
Provided that the Reserve Bank or the Central Government shall not impose any restriction on
the drawal of foreign exchange for payment due on account of amortization of loans or for
depreciation of direct investments in the ordinary course of business.
 (2A) The Central Government may, in consultation with the Reserve Bank, prescribe––
(a) any class or classes of capital account transactions, not involving debt instruments, which
are permissible;
(b) the limit up to which foreign exchange shall be admissible for such transactions; and
(c) any conditions which may be placed on such transactions.
 (3) Omitted;
 (7) For the purposes of this section, the term “debt instruments” shall mean, such instruments
as may be determined by the Central Government in consultation with the Reserve Bank.

Section 46 of FEMA - amendments by Finance Act, 2015
 Power to make rules.—
 (1) The Central Government may, by notification, make rules to carry out the provisions of this
Act
 (2) Without prejudice to the generality of the foregoing power, such rules may provide for,—
 (a) the imposition of reasonable restrictions on current account transactions under section 5;
 (aa) the instruments which are determined to be debt instruments under sub-
section(7) of section 6;
 (ab) the permissible classes of capital account transactions in accordance with sub-
section(2A) of section 6, the limits of admissibility of foreign exchange, and the
prohibition, restriction or regulation of such transactions;”;
 (gg)the aggregate value of foreign exchange referred to in subsection (1) of section
37A

Important Definitions under FEMA
 S. 2(e) “capital account transaction" means a transaction which alters the
assets or liabilities, including contingent liabilities, outside India of persons
resident in India or assets or liabilities in India of persons resident outside
India, and includes transactions referred to in subsection (3) of section 6
 S. 2(j) “current account transaction" means a transaction other than a
capital account transaction and without prejudice to the generality of the
foregoing such transaction includes,-
 (i) payments due in connection with foreign trade, other current business,
services, and short- term banking and credit facilities in the ordinary
course of business,
 (ii) payments due as interest on loans and as net income from
investments,
 (iii) remittances for living expenses of parents, spouse and children
residing abroad, and
 (iv) expenses in connection with foreign travel, education and medical care
of parents, spouse and children

 S. 2(v) " person resident in India" means-
 (i) a person residing in India for more than one hundred and eighty- two
days during the course of the preceding financial year but does not
include-
 (A) a person who has gone out of India or who stays outside India, in
either case-
 (a) for or on taking up employment outside India, or
 (b) for carrying on outside India a business or vocation outside India, or
 (c)for any other purpose, in such circumstances as would indicate his
intention to stay outside India for an uncertain period;
 (B) a person who has come to or stays in India, in either case,
otherwise than-
 (a) for or on taking up employment in India, or
 (b) for carrying on in India a business or vocation in India, or
 (c) for any other purpose, in such circumstances as would indicate his
intention to stay in India for an uncertain period;

 S. 2(v) " person resident in India" means – (con’t)
 (ii) any person or body corporate registered or incorporated in India,
 (iii) an office, branch or agency in India owned or controlled by a
person resident outside India,
 (iv) an office, branch or agency outside India owned or controlled by a
person resident in India
 S. 2(w) " person resident outside India" means a person who is not
resident in India

 ‘Non-Resident Indian’ (NRI) means an individual resident outside India who
is a citizen of India or is an ‘Overseas Citizen of India’ cardholder (‘OCI’)
within the meaning of section 7 (A) of the Citizenship Act, 1955.
 ‘Persons of Indian Origin’ cardholders registered as such under Notification
No. 26011/4/98 F.I. dated 19.8.2002 issued by the Central Government
are deemed to be ‘Overseas Citizen of India’ cardholders
 OCI is wider in scope than PIO which used to be up to 3 generations of
foreign citizens. Now up to 4th generation of foreign citizens can be
considered as OCI. Further, there are additional conditions in case of
spouses that marriage should have subsisted for at least two years prior to
application for OCI card.

 Following categories of foreign nationals are eligible for registration as Overseas Citizen of India
(OCI) Cardholder:-
(1) Who was a citizen of India at the time of, or at any time after the commencement of the
Constitution i.e. 26.01.1950; or
(2) who was eligible to become a citizen of India on 26.01.1950; or
(3) who belonged to a territory that became part of India after 15.08.1947; or
(4) who is a child or a grandchild or a great grandchild of such a citizen; or
(5) who is a minor child of such persons mentioned above; or
(6) who is a minor child and whose both parents are citizens of India or one of the parents is a
citizen of India; or
(7) spouse of foreign origin of a citizen of India or spouse of foreign origin of an Overseas Citizen
of India Cardholder registered under section 7A of the Citizenship Act, 1955 and whose marriage
has been registered and subsisted for a continuous period of not less than two years immediately
preceding the presentation of the application.
 Note : No person, who or either of whose parents or grandparents or great grandparents is or
had been a citizen of Pakistan, Bangladesh or such other country as the Central Government
may, by notification in the Official Gazette, specify, shall be eligible for registration as an
Overseas Citizen of India Cardholder.

 FEMA Notification No. 5(R) relating to Deposits by non-residents still
continues with definition of “ Person of Indian origin" as amended in-line
with OCI definition. Accordingly, as per FEMA 5(R):
‘Person of Indian Origin (PIO)’ means a person resident outside India who is a citizen of any
country other than Bangladesh or Pakistan or such other country as may be specified by the
Central Government, satisfying the following conditions:
 a) Who was a citizen of India by virtue of the Constitution of India or the Citizenship Act, 1955
(57 of 1955); or
 b) Who belonged to a territory that became part of India after the 15th day of August, 1947; or
 c) Who is a child or a grandchild or a great grandchild of a citizen of India or of a person
referred to in clause (a) or (b); or
 d) Who is a spouse of foreign origin of a citizen of India or spouse of foreign origin of a person
referred to in clause (a) or (b) or (c)
 Explanation: for the purpose of this sub-regulation, the expression ‘Person of Indian Origin’
includes an ‘Overseas Citizen of India’ cardholder within the meaning of Section 7(A) of the
Citizenship Act, 1955.

 However, FEMA Notification No. 21 relating to Acquisition & Transfer of
Immovable Property in India by NRIs & PIOs still continues with definition
of “ Person of Indian origin" without any amendment. Accordingly, as per
FEMA 21:
A ‘Person of Indian Origin' means an individual (not being a citizen of
Pakistan or Bangladesh or Sri Lanka or Afghanistan or China or Iran or
Nepal or Bhutan) who
 (i) at any time, held an Indian Passport or
 (ii)who or either of whose father or mother or whose grandfather or
grandmother was a citizen of India by virtue of the Constitution of India or
the Citizenship Act, 1955 (57 of 1955).

Fundamentals of FEMA
 Foreign Exchange belongs to Govt. of India except permitted.(Sec 5
about Current Account Transaction and Sec 6 about Capital Account
Transactions)
 Dealing in Foreign Exchange by PRII as well as by PROI is
regulated(Section 3 of The FEMA )
 Dealing between PRII and PROI in Rupees is also
regulated(Borrowing and Lending in Rupees, deposit in Rupees,
Gifts in India by PROI except to relatives etc)
 Permissible Capital Account or Current Account Transaction -Drawal
of Foreign Exchange are specific to purposes for which they are
granted.

 SEC. 3: Dealing in foreign exchange, etc.
 Save as otherwise provided in this Act, rules or regulations made there under, or with the
general or special permission of the Reserve Bank, no person shall-
 (a) deal in or transfer any foreign exchange or foreign security to any person not being an
authorized person;
 (b) make any payment to or for the credit of any person resident outside India in any manner;
 (c) receive otherwise through an authorized person, any payment by order or on behalf of any
person resident outside India in any manner.
Explanation.- For the purpose of this clause, where any person in, or resident in, India
receives any payment by order or on behalf of any person resident outside India through any
other person (including an authorized person) without a corresponding inward remittance from
any place outside India, then, such person shall be deemed to have received such payment
otherwise than through an authorized person;
 (d) enter into any financial transaction in India as consideration for or in association with
acquisition or creation or transfer of a right to acquire, any asset outside India by any person.
Explanation.- For the purpose of this clause," financial transaction" means making any
payment to, or for the credit of any person, or receiving any payment for, by order or on behalf
of any person, or drawing, issuing or negotiating any bill of exchange r promissory note, or
transferring any security or acknowledging any debt.

SEC. 4: Holding of foreign exchange, etc.
 Save as otherwise provided in this Act, no person resident in India shall acquire, hold, own,
possess or transfer any foreign exchange, foreign security or any immovable property situated
outside India.
SEC. 5: Current account transactions
 Any person may sell or draw foreign exchange to or from an authorized person if such sale or
drawal is a current account transaction:
Provided that the Central Government may, in public interest and in consultation with the
Reserve Bank, impose such reasonable restrictions for current account transactions as may be
prescribed.
SEC. 6: Capital account transactions (before amendments by Finance Act, 2015)
 (1) Subject to the provisions of subsection (2), any person may sell or draw foreign exchange
to or from an authorized person for a capital account transaction.
 (2) The Reserve Bank may, in consultation with the Central Government, specify-.
(a) any class or classes of capital account transactions which are permissible;
(b) the limit up to which foreign exchange shall be admissible for such transactions:
Provided that the Reserve Bank shall not impose any restriction on the drawal of foreign
exchange for payments due on account of amortization of loans or for depreciation of direct
investments in the ordinary courts of business.

SEC. 6: Capital account transactions (con’t)
 (3) Without prejudice to the generality of the provisions of subsection (2), the Reserve Bank
may, by regulations, prohibit, restrict or regulate the following-
(a) transfer or issue of any foreign security by a person resident in India;
(b) transfer or issue of any security by a person resident outside India;
(c) transfer or issue of any security or foreign security by any branch, office or agency in India
of a person resident outside India;
(d) any borrowing or lending in foreign exchange in whatever form or by whatever name
called;
(e) any borrowing or lending in rupees in whatever form or by whatever name called between
a person resident in India and a person resident outside India;
(f) deposits between persons resident in India and persons resident outside India;
(g) export, import or holding of currency or currency notes;
(h)transfer of immovable property outside India, other than a lease not exceeding five years,
by a person resident in India;
(i) acquisition or transfer of immovable property in India, other than a lease not exceeding five
years, by a person resident outside India;
(j) giving of a guarantee or surety in respect of any debt, obligation or other liability incurred-
(i) by a person resident in India and owed to a person resident outside India; or
(ii) by a person resident outside India.

SEC. 6: Capital account transactions (con’t)
 (4) A person resident in India may hold, own, transfer or invest in foreign currency,
foreign security or any immovable property situated outside India if such currency,
security or property was acquired, held or owned by such person when he was
resident outside India or inherited from a person who was resident outside India.
 (5) A person resident outside India may hold, own, transfer or invest in Indian
currency, security or any immovable property situated in India if such currency,
security or property was acquired, held or owned by such person when he was
resident in India or inherited from a person who was resident in India.
 (6) Without prejudice to the provisions of this section, the Reserve Bank may, by
regulation, prohibit, restrict, or regulate establishment in India of a branch, office or
other place of business by a person resident outside India, for carrying on any
activity relating to such branch, office or other place of business.

P. P. Shah & Asso. 20
FEMA Practice
PRIIs PROIs
Current Account
Transactions
Capital Account
Transactions
Section 3 of FEMA
applicable to both
PRIIs & PROIs
Capital Account
Transactions
Exceptions:
LRS Scheme
Schedules I, II &
III of FEMA
(Current Account
Transactions)
Rules, 2000
Schedule I of
FEMA Notf. 1
Schedule II of
FEMA Notf. 1
Exceptions:
FEMA Notf. 13Except 4 items of
Sch. III, all items
are subsumed with
LRS
Remittances other than by individuals in excess of specified
limits towards:
i. Donations to reputed technical / educational institutions;
ii. Commissions to agents abroad for sale of property in
India;
iii. Remittances for consultancy services for infra projects;
iv. Remittances by way of reimbursement of pre-
incorporation expenses

FEMA Practice
Government RBI
Current Account
Transactions Industrial Policy
Capital Account
Transactions
Rules a. Sectoral guidelines
b. Public Sector
c. Hazardous
d. Small Scale
ADMA Circulars
Master Directions /
Master Circulars
A.D. Banks
Notifications

FEMA Practice
 Structure the transaction as compliant with conditions of
Automatic route
 Permissible transactions of every person either PRII or
that of PROI are specific as to General or Specific
Approval.
eg. Schedule 1 to 11 of Notf20,Fema 24 and Purpose of
Notf 20/21/FDI. Purpose of drawal-Specific to use.
 Ability to structure any transaction as Current account
transaction
 Interpretation of the provision, intention and philosophy
is preferable over the literal meaning.
 A Circular law- Dynamics

FEMA Practice -
Revised Notifications & Master Directions
NTF. No. Subject Revised NTF. No., if issued Master Direction, if issued
1 Permissible Capital Account Transactions - -
2 Issue of Security in India by a branch, office
or agency of a PROI
- -
3 Borrowing and lending in Foreign currency - FED No. 5 / 2015-16
4 Borrowing and lending in Rupees - FED No. 6 / 2015-16
5 Deposits by NRs FEMA 5(R)_ FEM (Deposit) Regn. 2016 dt.
01.04.2016
FED No. 14 / 2015-16
6 Export and Import of foreign currency FEMA 06(R)_ FEM (Import & Export of
Currency) Regn 2015 dt 29.12.2015
7 Acquisition and transfer of immovable
properties outside India
FEMA 7(R)_ FEM (Acquisition and Trnsfr of
Immovable Properties outside India) Regn
2015 dt 21.01.2016
FED No. 12 / 2015-16
8 Guarantees - -
9 FE realisation, repatriation, surrender FEMA 09(R)_ FEM (Realisation, repatriation,
surrender of FX) Regn 2015 dt 29.12.2015
-
10 Foreign Currency Accounts by a PRII FEMA 10(R)_ FEM (Foreign Currency Accounts
by PRII) Regn 2015 dt 21.01.2016
FED No. 14 / 2015-16
11 Possession and retention of Foreign
currency
FEMA 11(R)_ FEM (Possession and Retention of
FC) Regn 2015 dt 29.12.2015
-
12 Insurance FEMA 12(R)_ FEM (Insurance) Regn 2015 dt
29.12.2015
FED No. 9 / 2015-16
13 Remittance of assets in India FEMA 13(R)_ FEM (Remittance of Assets) Regn
2016 dt 01.04.2016
FED No. 13 / 2015-16

FEMA Practice -
NTF. No. Subject Revised NTF. No., if issued Master Direction, if issued
14 Manner of receipt and payment FEMA 14(R)_ FEM (Manner of Receipt and
Payment) Regn 2016 dt 02.05.2016
-
15 Definition of Currency FEMA 15(R)_ FEM (Currency) Regn 2015 dt
29.12.2015
-
16 Receipt and payment to person outside
India
- -
17 Transaction in Indian rupees with resident of
Nepal and Bhutan
- -
18 Post Office (Postal Money Orders) FEMA 18(R)_ FEM (Postal Money Order) Regn
2015 dt 29.12.2015
-
19 Overseas Direct Investment - FED No. 15 / 2015-16
20 FDI, PIS - -
21 Immovable property in India - FED No. 12 / 2015-16
22 Branch etc in India FEMA 22(R)_ FEM (Branch Liaison Project
office) Regn 2016 dt 31.03.2016
FED No. 10 / 2015-16
23 Export of Goods & Services FEMA 23(R)_ FEM (Export of Goods & Services)
Regn 2015 dt 12.01.2016
FED No. 16 / 2015-16
24 Investment in Firm or Proprietary concern in
India
- -
25 Foreign exchange derivative contracts - -

FEMA Practice -
Subject Master Direction
Import of Goods & Services FED No. 17 / 2015-16
Liberalized Remittance Scheme FED No. 7 / 2015-16
Compounding of Contraventions FED No. 4 / 2015-16
Other Remittance facilities (current account) FED No. 8 / 2015-16
Reporting under FEMA FED No. 18 / 2015-16
Misc Directors that do not figure in other Master Directions (TDS on
remittances, repatriation of assets abroad & under LRS, Medical expenses
of NRI, Routing of funds to India, SIT - sharing of information, IFSC
guidelines, FEMA & Black Money Act)
FED No. 19 / 2015-16
Money Changing Activities FED No. 3 / 2015-16
Vostro Accounts by Non-Resident Exchange Houses FED No. 2 / 2015-16
Gold Monetisation Scheme 2015 dt 22.10.2015_amended to 21.01.2016 DBR.IBD.No.45/ 23.67.003 /
2015-16

FEMA Practice
PROI
Foreign Citizen NRIs Other entities
Deposit- Notf.5(R) –Banking
Accounts of PROI plus few cases in
Notf. 10
[Can open for limited
purpose as
mentioned in Notf.5 &
10
√
[Notf.5 ]
√
[Notf.10 ]
Branch /Liaison - Notf. 22(R) NA NA Prior approval through AD
√
[except citizen of 8
countries]
Project office NA NA Auto Route with
conditions except 7
citizens
Immovable property in India-
Notf.21
X √ √
[ For branch, office or
other place of business for
carrying on in India any
activity, excluding a liaison
office]

FEMA Practice
PROI
Partnership business in
India- Notf.24
X
(Prior approval on
Repatriation basis)
√
(Auto Route on non repatriation basis
,Repatriation -Prior approval (Prior approval on
repatriation basis)
Borrowings in rupees Restricted only to rupee borrowings
-From relative SBT End use restrictions.(Reg 8B)
-Special provision for housing loan by AD in
rupee to non resident and loan against security
of shares and immovable property (Reg.8 and 7)
-body corporate registered or incorporated in
India may grant rupee loan to its employees who
is a non-resident Indian or a Person of Indian
Origin(Regulation 8A)
-Loan for acquiring share of Indian co. under
ESOP (Reg.7)
-loan granted to a non-resident by an authorised
dealer, in accordance with Regulation 7 , may be
repaid by any relative of the borrower in India by
crediting the borrower's loan account through
the bank account of such relative.(Reg7A)

FEMA Practice
PROI
Lending in FE
Lending in rupee
Close relative in Foreign
exchange- Notf.3
Indian co- NCD- Notf.4
Notf.5 – against fund held in
account
ECB
Lending by way of
Deposits
Schedule 6 & 7 of notf.5(R) ,
Loan from NRO account,
Commercial paper
Portfolio Investment Notf. 20 – schedule 2,
2A,5,8
[Notf. 20 - schedule 3 and 5 Notf. 20 – schedule 2,
2A ,5,8
Note: Schedule 2 is for FII and its sub accounts only and Schedule 8 is for QFIs. SEBI
(FII) Regn & QFI framework have been replaced by SEBI (RFPI) Regn and accordingly,
RFPIs can invest under Schedule 2A RFPI route
FDI Notf. 20 - schedule
1,6,9,11
Notf. 20 - schedule 1,4, 6,9 Notf. 20 - schedule
1,6,9,11

FEMA Practice
PRII
Individual Other entities
Current Account transaction
FE Account Notification 10(R),RFC,RFC(domestic), EEFC
Export of goods and service- Notf.
23(R)
√ √
PEM- A.P. Dir cir 32 dt 20/10/03 A.P.
Dir cir 118 20/6/2013 & 51 dt
20/09/13
√ √
Branch /Liaison /Project office outside
India – Notf. 47/2001 ,A.P. Dir 39 dt
20/4/2002,A.P. Dir cir 18 dt 4/12/2006;
√ √
Overseas Investment – Notf. 120 √ √

FEMA Practice
PRII
Borrowing in
Foreign Exchange
Borrowing in
rupee
Notf.3 – From close relative, from bank
outside India for execution of turnkey project
outside India, foreign currency credit from
overseas supplier, Buyer’s credit & ECB
Notf.4 – From NRI , PIO(to entities other than
co’s) (NRB)
Notf.5(R) – Deposit on non- repatriation
basis, Repatriation basis(Public)
Notf.3 – ECB as per Guidelines as to rate,
end use, eligible lenders
Notf.3 – ECB as per Guidelines
Notf.4 – NCD(Public)(NRB or RB)

FEMA Practice

 .
PRII
Lending in FE
Lending in rupee
Notf.3- Out of EEFC for trade related
purpose
Notf.4 – to close relative ( Regulation 8B)
-loan granted to a non-resident by an
authorised dealer, in accordance with
Regulation 7, may be repaid by any
relative of the borrower in India by
crediting the borrower's loan account
through the bank account of such
relative.(Reg.7A)
Notf.3 – to its WOS or JV outside India, to its
employee outside India
Notf.4 -body corporate registered or
incorporated in India may grant rupee loan to
its employees who is a non-resident Indian or a
Person of Indian Origin(Regulation 8A)
-Special provision for housing loan by AD in
rupee to non resident and loan against security
of shares and immovable property (Reg.8 and
7)
-Loan for acquiring share of Indian co. under
ESOP (Reg.7)
Immovable
property abroad
Notf.7(R) Notf. 120 for bonafide overseas Business
activities
LRS Any permitted CAT or CAP SBT restrictions & provision

Case study - Overview
I. Incorporation of WOS by an Indian company and deputation of Indian citizen
to promote business of a Wholly Owned Subsidiary(Residential Status)
II. Travel abroad – Private visit or business visit (CAT)
III. Branch outside India and Project Export (Export of Goods and Services)
IV. Real estate by NRI in India(Provisions and Purpose India-Notf 20,21 and FDI)
V. Investment outside India for co-production of the Film(CAT, CAP, Borrowing
etc-Notf 3,4,120 and Current Account Transactions)
VI. Guarantee by PRII in favour of Foreign Step Down Subsidiary(Overseas
Investment-Notf 120)
VII. Overseas Investment(Notf 120)
VIII. Opening of project office in India (Notf 22(R))
IX. Invocation of pledge of promoter's shares( FDI and Pledge ,Notf 20)
X. Acquisition of Immovable property by Prohibited persons(Notf 21)
XI. Borrowings by Indian company from Non resident promoter(Notf 3, 4,5(R)
and 20)
XII. Investment by US investor in Indian Venture Capital industry

Case study –I Overseas Employment
 Incorporation of WOS by an Indian company and deputation of
one Indian citizen to promote business of Wholly Owned
Subsidiary
 India Ltd. is planning to incorporate a wholly owned subsidiary in U.K. and
proposing deputation of one of its chief executive Mr. Lewis an Indian
Citizen to pursue promotion of business of Wholly Owned Subsidiary (WOS).
Number of option deliberated on proposed deputation of Mr. Lewis to U.K.
were as under:-
 To relocate the employment of Mr. Lewis to U.K.
 To request Mr. Lewis to look after operations in India & U.K., simultaneously
as duties may not require aggregate travel of about 100 days to U.K. for few
years
 To relocate the employment of Mr. Lewis to U.K. and request him to travel
to India from time to time for Indian operations.

Case study –I Overseas Employment
Question for consideration
Mr. Lewis requested you to advise him:-
 i. on his Residential Status in above situations under FEMA.
 ii. Advise Mr. Lewis on
 a.possibility of dual employment, both in India & U.K. under FEMA & under
I.T. Act’ 1961. and
 b. his Non-Resident status under FEMA, on account of his desire to migrate
his family to U.K. & for higher studies of his children and various investment
proposition.
 iii. India Ltd. also has WOS in Tax Heaven near U.K. Discuss the employment
potential with such a Tax Heaven company and residential status under
FEMA, and his plan to migrate his family to U.K. & investment proposal
outside India?
 Leads to solution: a.Under FEMA Intention based defination do not require
stay of 181 days in India. b.Under Tax Laws India does not require a person
to be a Tax Resident of any other country in order to be a Non Resident

Case study –I
Overview of Legal framework
 Under FEMA residential status is of two types :
A. Person resident in India
B. Person resident outside India
 According to Sec 2(v) of FEMA " person resident in India" means-
(i) a person residing in India for more than one hundred and eighty- two days during the course of the
preceding financial year but does not include-
 (A)a person who has gone out of India or who stays outside India, in either case-
a) for or on taking up employment outside India, or
b)for carrying on outside India a business or vocation outside India, or
c)for any other purpose, in such circumstances as would indicate his intention to stay outside India for an
uncertain period;
 (B)a person who has come to or stays in India, in either case, otherwise than-
a)for or on taking up employment in India, or
b)for carrying on a business or vocation in India, or
c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an
uncertain period;
(ii)any person or body corporate registered or incorporated in India,
(iii)an office, branch or agency in India owned or controlled by a person resident outside India,
(iv) an office, branch or agency outside India owned or controlled by a person resident in India;
As per sec 2 (w) " person resident outside India" means a person who is not resident in India;

Case study –I
 Residential status for I.T.Act is determined u/s 6 as under :
Sec. 6(1) An individual will be treated as resident in India in any previous year if he fulfils any of the
following two conditions:
(a) he is in India in that year for a period or periods amounting in all to 182 days or more; or
(b) having within the four years preceding that year been in India for a period or periods amounting in all
to 365 days or more and has been in India for 60 days or more in that year.
Under Explanation to section 6(1) of the Income-tax Act, the residential status of an individual who is
rendering service outside India and who visits India during leave or vacation in any previous year or an
individual who is outside India and who comes on a visit to India in any previous year will be determined
as under:
 (a) An Indian citizen who leaves India in any previous year for the purpose of employment
outside India or as a crew member of an Indian ship would be treated as resident in India if he stays in
India in that year for 182 days or more (instead of 60 days as stated in 1(b) above). Conversely, if he
stays in India less than 182 days, he will be treated as non-resident for that year and his foreign income
would not attract tax liability.
 (b) An Indian citizen or a person of Indian origin who being outside India outside India and who
comes on a visit to India in any previous year will be treated as resident in India if he stays in India in that
year for 182 days or more [instead of 60 days as stated in 1(b) above]. Conversely, he will be treated as
non-resident if he stays in India in that year less than 182 days.
 (3) An individual (whether Indian citizen or not) who is outside India and who comes on a visit to India
in any previous year will be treated as “non-resident” in India if he stays in India in that previous year less
than 182 days subject to the condition that during the preceding four previous years his stay in India does
not amount to 365 days or more.(Average of 116 days in a year)

Case study –I
 An Individual who fulfils any of the conditions mentioned in section 6(1) is
treated as resident in India. But in order to become an “ordinarily resident”,
he must satisfy the following two conditions as laid down under section
6(6) of the Income-tax Act, 1961 the provisions are :
 (i) He should have been resident in India in nine out of the ten previous
years preceding the previous year in which he is resident within the
meaning of section 6(1); and
 (ii) He should have been in India for a period or periods amounting in all
to 730 days (i.e. on an average 104 days per year) or more during the
seven years preceding that previous year.
If he does not fulfill any one of the above conditions, he will be treated as
“not ordinarily resident”

Case study –I
 section 5 defines the scope of income liable to tax.
 (1) Under this section, the resident is charged to tax on all the incomes:
i) which is received or is deemed to be received in India;
ii) which accrues or arises or is deemed to accrue or arise in India; and
iii) which accrues and arises outside India.
In other words, the world income is taxable in case of a resident.
 (2) Person who is resident but not ordinarily resident is liable to tax same
way as that of resident except that the income which accrues or arises
outside India is not taxable in India unless it is derived from a business
controlled in or a profession set up in India.
 (3) In case of a non-resident, the income received or deemed to be
received in India or income accrues or arises or is deemed to accrue or
arise in India only is taxable in India. In other words, the income accruing
or arising outside India is not taxable in India even though it is remitted to
India.

Case Study –I
Applicability to Case study:
 Mr. Lewis is given with three options:
i)To relocate the employment of Mr. Lewis to U.K.
ii)To request Mr. Lewis to look after operations in India & U.K., simultaneously as duties may not require
aggregate travel of about 100 days to U.K., for few years.
iii)To relocate the employment of Mr. Lewis to U.K. and request him to travel to India from time to time
for Indian operations
 Analysis of the definition of person resident in India as given in sec. 2 (v) of FEMA for the purpose of
given case:
Person to be resident in India , has to reside for more than 182 days during the previous financial year .
However exclusion to this is - if a person goes out of India for employment , for vocation or
for any other purpose for uncertain period , then even if he has resided in India for more
than 182 days he will become person resident outside India.
 Analysis of the sec. 6 of Income Tax Act 1961 for the purpose of given case: From combine reading of
sec. 6 and explanation to sec. 6 (1) , we can conclude that if a person goes outside for employment then
the second condition of sec. 6(1) i.e. more than 364 days in 4 years does not apply. Thus, only the first
condition of more than 181 days (182 days or more days )will be applicable.
From second year, he will become ‘a person visiting India’ and therefore, expln (b) will be applicable.
Thus, again second condition of more than 364 days in 4 years would not apply. Only the first condition
of more than 181 days will be applicable.

Case study – I
Thus it is advisable for a person leaving India for employment to leave India before 28th September
otherwise total income taxable for Non DTAA countries.
Further If person remains NR for 2 successive year ,then he is R but not OR.In this case foreign
income of R but NOR is not liable to tax in India.
Discussion:
Q.1Advise on residential status under given option to Mr. Lewis under FEMA
i)To relocate the employment of Mr. Lewis to U.K.
Mr .Lewis can do so but it is a burden on him to establish that he has gone abroad
for the purposes of his employment however he may be Resident under ITA 1961.
ii)To request Mr. Lewis to look after operations in India & U.K., simultaneously with dual Employment
Mr.Lewis can do so with a designation as Group MD, employed with a Company
where Head office Function is located outside India say Jersey. Mr.Lewis could be
Resident or a Non Resident depending upon his stay/visit in India.
Refer Sec 9(1)(ii) read with Sec 5 of the Act. Refer (1980) 124 ITR 391 (Guj) CIT vs S.G.
Pgnatale
iii)To relocate the employment of Mr. Lewis to U.K. and request him to travel to India from time to
time for Indian operations/overseas operations
As discussed Mr.Lewis will be person resident outside India as he goes out of India for
employment.
Caution: Intention based definition, Anti avoidance under ITA, Exercise of
employment/activity as a Non Resident in India

Case study –I
 Incidental benefits to be a PROI: Apart from various investments opportunities
in India, there are several other advantages to the PROI, which are outlined below:
 can freely acquire immoveable properties abroad out of earnings abroad. He can
invest anywhere in the world. He can start any business abroad. He can become
trustee-beneficiary of a trust set up abroad. He can retain all these even on his
return to India and need not even intimate RBI about his foreign assets. But in Tax
return disclose foreign Assets and the signatory to the Bank Accounts
 can set up family trusts abroad for education of his children/ maintenance of his
family members. Such trusts can also be Asset Protection Trusts where the assets
held by the trust are free from attachment by the creditors.
 can bring 10 kgs. of gold on payment of concessional duty, once in six months on
his visit to India.
 foreign income is not liable to tax in India. Certain income in India is exempt from
tax
 can enjoy wealth tax concessions in India on his Foreign Exchange assets in India.
 can seek Advance ruling from Advance Ruling Authority on taxability (income tax) of
transactions.

Case study –I
 Advantages to NRI (cont’d..)
 can avail the benefits of the Double Tax Avoidance Agreements (DTAAs) entered
into by India with several countries which attempt to minimize double tax on the
same income (i.e. if tax is payable in India by NRIs on their income in India,
credit for tax payable is available against tax payable in foreign country on such
income). Also tax on dividends, royalty, fees for technical services earned in
India by NRIs are offered concessional tax treatment under most DTAAs.
Further, in few cases, tax may not be payable at all on such income if the NRI is
a tax resident of a treaty country.
 There are special reserve seats for children of NRIs for Engineering/Medical/MBA
courses in certain institutions in India provided the fees are paid in foreign
exchange.
 Further as per sec . 6(5) of Foreign Exchange Management Act A person
resident outside India may hold, own, transfer or invest in Indian currency,
security or any immovable property situated in India if such currency, security or
property was acquired, held or owned by such person when he was resident in
India or inherited from a person who was resident in India

Case study – II (Travel Allowance)
 Travel abroad
 Kindly advise Mr. Traveller from India to a place (other than Nepal and
Bhutan) outside India, as to what is the maximum amount he can spent on
his private visit to a tourist destination or a business visit outside India?
Lead to the Solution:
 Allowance for Private Visit in Foreign Currency,
 Allowance for debit to the Credit Card of the PRII,
 RFC Account,
 RFC (D) Account,
 Export of INR.
 Business Visit.
 Payment to Indian operator
 Hospitality abroad
 Branch abroad

Case study – II (Travel Allowance)
 Overview of legal provision
 Sec 2(e) of Foreign Exchange Management Act defines capital transaction as capital
account transaction" means a transaction which alters the assets or liabilities,
including contingent liabilities, outside India of persons resident in India or assets or
liabilities in India of persons resident outside India, and includes transactions
referred to in subsection (3) of section 6
 Sec 2 (j) of Foreign Exchange Management Act defines current transaction as "
current account transaction" means a transaction other than a capital account
transaction and without prejudice to the generality of the foregoing such transaction
includes,-
 (i) payments due in connection with foreign trade, other current business, services,
and short- term banking and credit facilities in the ordinary course of business,
 (ii) payments due as interest on loans and as net income from investments,
 (iii) remittances for living expenses of parents, spouse and children residing abroad,
and
 (iv) expenses in connection with foreign travel, education and medical care of
parents, spouse and children

Case study – II
 Section 5 of FEMA states that
 Any person may sell or draw foreign exchange to or from an authorized person
if such sale or drawal is a current account transaction:
Provided that the Central Government may, in public interest and in
consultation with the Reserve Bank, impose such reasonable restrictions for
current account transactions as may be prescribed.
Accordingly restriction on current transaction is divided into three categories:
 Schedule I of FEM(CAT)Rules- deals with the transaction which are prohibited
 Schedule II of FEM(CAT)Rules- deals with the transaction which requires prior
approval of Central government
 Schedule III of FEM(CAT)Rules- deals with the transaction which
requires prior approval of RBI if amounts are exceeding the amount
stated in the schedule

Case study – II
 As per rule 5 of FEM(CAT)Rules - Prior approval of Reserve Bank.— Every drawal of
foreign exchange for transactions included in Schedule III shall be governed as provided
therein:
 Provided that this rule shall not apply where the payment is made out of funds held in
Resident Foreign Currency (RFC) Account of the remitter.
 As per rule 6 (1)Nothing contained in rule 4 or rule 5 shall apply to drawal made out of
funds held in Exchange Earners’ Foreign Currency (EEFC) account of the remitter.
 Rule 6 (2) Notwithstanding anything contained in sub-rule (1), restrictions imposed
under rule 4 or rule 5 shall continue to apply where the drawal of foreign exchange from
the Exchange Earners’ Foreign Currency (EEFC) account is for the purpose specified in
items 10 and 11 of Schedule II, or items 3, 4, 11, 16 and 17 of Schedule III as the case
may be.
 As per rule 7 of FEM(CAT)Rules - Nothing contained in rule 5 shall apply to the use of
International Credit Card for making payment by a person towards meeting
expenses while such person is on a visit outside India.

Case study – II
 As per schedule III(Item no. 1) of FEM(CAT) Rules 2000 w.e.f. 26.05.2015, Individuals can avail
of foreign exchange facility for the following purposes within the limit of USD2,50,000 only. Any
additional remittance in excess of the said limit for the following purposes shall require prior
approval of the Reserve Bank of India.
(i) Private visits to any country (except Nepal and Bhutan).
(ii) Gift or donation.
(iii) Going abroad for employment.
(iv) Emigration.
(v) Maintenance of close relatives abroad.
(vi) Travel for business, or attending a conference or specialised training or for meeting expenses
for meeting medical expenses, or check-up abroad, or for accompanying as attendant to a patient
going abroad for medical treatment/ check-up.
(vii) Expenses in connection with medical treatment abroad.
(viii) Studies abroad.
(ix) Any other current account transaction
Provided that for the purposes mentioned at item numbers (iv), (vii) and (viii), the individual may avail
an amount in excess of the LRS limit if it is so required by a country of emigration, medical institute
offering treatment or the university, respectively:
Provided further that if an individual remits any amount under the said LRS in a financial year, then the
applicable limit for such individual would be reduced from USD 250,000 by the amount so remitted

Case study – II
 Further in terms of Regulation 3 of Notification 6(R) - any person resident in India may
take outside India (other than to Nepal and Bhutan) currency notes of Government of
India and Reserve Bank of India notes upto an amount not exceeding Rs.25,000 per
person;
 RFC Account Rules Reg 4(B)(2) of the Notf 10 states that
The funds in a Resident Foreign Currency Account opened or held or maintained in terms
of sub-regulation (1) shall be free from all restrictions regarding utilisation of foreign
currency balances including any restriction on investment in any form, by whatever name
called, outside India - Utilisation from account is free from all the restrictions
 EEFC account Reg 4(A) of Notf 10(R) and Schedule I [Paragraph 3(i]) permits
withdrawal for any CAT without any limit
 RFC Domestic Reg 5A of Notf 10(R) permits withdrawal for private or business
visit or for permitted CAT.

Case study – II
 As per Regulation 7 of Notification 6(R)- any person may take or send out of India, -
(Enabling provisions to take FE out of India on a private visit/s including
unspent amount of vessel)
 Cheques drawn on foreign currency account maintained in accordance with Foreign
Exchange Management (Foreign Currency Accounts by a person resident in India)
Regulations, 2000;
 foreign exchange obtained by him by drawal from an authorised person in accordance
with the provisions of the Act or the rules or regulations or directions made or issued
thereunder ;
 currency in the safes of vessels or aircrafts which has been brought into India or
which has been taken on board a vessel or aircraft with the permission of the Reserve
Bank ;
 any person may take out of India, -
 foreign exchange possessed by him in accordance with the Foreign Exchange
Management (Possession and Retention of Foreign Currency) Regulations, 2000 ;
 unspent foreign exchange brought back by him to India while returning from travel
abroad and retained in accordance with the Foreign Exchange Management
(Possession and Retention of Foreign Currency) Regulations, 2000 ;

Case study – II
 Foreign branch or H.O. or subsidiary abroad can also finance the expenses incurred by
person in case it is a Business visit
 Non resident (Friends and relative outside India) can extend hospitality to person
resident in India who is on visit outside India.
 As per Item No 2 of Sch. III of CAT Rules, the following remittances by persons other
than individuals shall require prior approval of the Reserve Bank of India:
i. Donations exceeding one per cent. of their foreign exchange earnings during the
previous three financial years or USD 5,000,000, whichever is less, for specified
purposes such as reputed educational / technical institutions
ii. Commission, per transaction, to agents abroad for sale of residential flats or
commercial plots in India exceeding USD 25,000 or five percent. of the inward
remittance whichever is more.
iii. Remittances exceeding USD 10,000,000 per project for any consultancy services in
respect of infrastructure projects and USD 1,000,000 per project, for other
consultancy services procured from outside India
iv. Remittances exceeding five per cent of investment brought into India or USD 100,000
whichever is higher, by an entity in India by way of reimbursement of pre-
incorporation expenses.

Case study – II
 Can expenditure on Current Account Transaction exceed the LRS limit of
US$ 250,000 per financial year?
 Yes, for transactions of following nature, viz.
 Emigration
 Expenses in connection with medical treatment abroad
 Studies abroad
proviso to Schedule III of CAT Rules permits availing exchange facility for an amount
in excess of the limit prescribed under the Liberalised Remittance Scheme as provided
in regulation 4 to FEMA Notification 1 if it is so required by a country of emigration,
medical institute offering treatment or the university, respectively
 If an employee is being deputed by an entity for business visit abroad and the
expenses are borne by the latter, such expenses shall be treated as residual current
account transactions outside LRS and may be permitted by the AD without any limit,
subject to verifying the bonafides of the transaction

Case study – III Export of goods
Branch Outside India
 A Ltd. is engaged in export of goods to branch outside India.
 A Ltd is informed of various circular, Notification 47/2001, A.P. Dir cir 39 dt 20/4/2002 ,
A.P. Dir cir 18 of 4/12/2006 dealing with Initial remittance for set up (15% of TO of last
two financial year or 25% of Net worth whichever is higher) and recurring expense (10%
of TO of last two financial year )
 Question arose as to
 A. Whether branch is required to receive export proceeds in accordance with Notf. 23 for
all the exports made.
 B. Whether A Ltd. is required to receive net of expenses or gross amount of export from
its branch
 C. Export of software with on – site development are allowed to bring in Foreign
Exchange net of expense on completing the project
Whether in similar manner A Ltd. Can also plan its transaction?
Leads: Residential status,
Sec.7 of FEMA read with applicability of sec. 2(j)(i)- CAT,
Notf. 23(R) regulates CAT to ensure documentation and FE entitlement and its
receipt by PRII

Case study – III
 Nature and Status of a Branch of an Indian company and its export
 Section 2(l) Export with all it’s grammatical variations and cognate expressions,
means
i)the taking out of India to place outside India any goods,
ii)provision of services from India to any person outside India
 Sec 2 (v) Person Resident in India means-
(i) a person residing …………………
(ii) any person or body corporate ………………….
(iii)an office, branch or agency in India …….
(iv)an office, branch or agency outside India owned or controlled by a person
resident in India.
All the provisions applicable to PRII will therefore be applicable to overseas branch
unless stated otherwise

Case study – III
Thus sec. 7 authorises RBI to make regulation in respect of PRII who is exporter.
Notf. 23(R) is issued to regulates activity of the exporter who is PRII so far as export value
and its repatriation is concerned.
 Regulation 9 deals with the realisation period of export and states that- Full Export value of
goods or software exported shall be realised and repatriated in India within 9 months from
the date of export. [However, goods exported to a warehouse established outside India shall
be repatriated as soon as it is realized and in any case within 15 months from the date of
shipment of goods]
 Thus : a) Goods taken out by a PRII is to be treated as export irrespective of the fact
that it is exported to Branch. However it may not be so in case of service as in that
case what is required is provision of service from India to any person outside India
.[Branch is person resident in India]
 b) Since it is export full value to be realised within 9 months unless period is
extended by RBI .
 c) “Full value” is referred to be repatriated. So, sale value net of expense can not be
considered.

Case study – III A Export of Project
 Project export
 Turnkey Project Ltd. an Indian company has bagged a contract to set up a
sugar mill in Uganda for a lumpsum price of US $ 10 mn. The contract
includes supply of Plant & Machinery from India, services of Indian company
in installation and commissioning of plant at site. A part of machinery is also
to be outsourced from third country for about US $ 2,00,000 to be installed
at site. It also requires various local services for installation estimated at US
$ 8,00,000.
 Indian company has been funded by the nationalised bank to execute the
turnkey project including the provision of services.
 Indian company seeks your advise to execute the transaction from stand
point of FEMA’1999 and secure arrangement to receive payment from
foreign customer, who is willing to deal through the banker.

Case study III A – Export of Project
 Issue: Deferred payment contract
 Purchase of goods without import into India
 Purchase of Overseas service
 Payment through bank
Leads :
 Documents for Export of goods: Delivery of title to the goods can be
exchanged by overseas Bank on acceptance of Letter of credit by the
overseas customer
 Service export: Title to the design, drawings, could be a milestone to ensure
payment mobilisation, advance, Performance guarantee, Neutral Certification
agency approved by Bank
 Other issue: Income tax on provision of service
 Service tax on provision of service
Comprehensive solution: Project export through AD/Exim bank, Form DPX and
the procedure

Case study III A Export of Project
 Project Export
 Indian exporters offering deferred payment terms to overseas buyers in respect of export of
goods and those who have been awarded turnkey, civil construction contracts by overseas
parties have to secure prior approval at post award stage for credit terms to be offered, third
country imports etc, from Authorised Dealer / Exim Bank which shall consider the proposal in
accordance with the guidelines issued by RBI under ‘PEM - Memorandum of Instructions on
Project Exports and Service Exports’.
 After entering into contract, the exporter should submit to his bankers an application in form
DPX-1 (in respect of turnkey and deferred payment supply contracts) or in form PEX-1 (in
respect of civil construction contracts), as the case may be, in six copies along with six copies
of the contract.(Cir 118 dt 26.6.2013)
By virtue of A.P. Dir cir 51 dt 20.9.2013, the above requirement of cir. 118 is dispensed with if
fund based or non fund based facility is availed from the AD/Exim Bank. However information to
ECGC will be required if insurance cover is taken.
Authorised dealers / Exim Bank may grant post-award clearance to the project proposal
without any monetary limit. If the authorised dealer desires participation of Exim Bank in the
financial arrangements and /or guarantee facilities, concurrence of Exim Bank should be
obtained before granting post award clearance.
 Conditions necessary for Clearance of proposals by Authorised Dealers / Exim Bank laid down
in para B.5 in PEM
. 22nd Oct 2016 P. P. Shah & Asso. 57

Case study III A
 Third Party purchase
While granting package approval for turnkey/civil construction contracts
involving purchase of machinery/equipment/materials from third country
sources, the authorised dealer or Exim Bank will indicate the extent upto which
such purchases may be made. If the part of proposed BOE is not required and
AD will inform accordingly to RBI
 Service Export: Payment will be made by AD for service provider if that is part
of information in Form DPX
 Project/ Service exporters may avail of facilities such as opening of foreign
currency accounts, temporary site offices, payment of agency commission and
availing of temporary overseas borrowings subject to the conditions as may be
stipulated by the Exim Bank on behalf of the Working Group on project exports
or Exim Bank/authorised dealer under the powers delegated to them
 Overseas Branch/Project office for Export

Case study III A
 Manner of receipt and payment
As per para A.3 of Master Direction on Export of goods and services
 The amount representing the full export value of the goods exported shall be
received through an AD Bank in the manner specified in the Foreign Exchange
Management (Manner of Receipt & Payment) Regulations, 2000 notified vide
Notification No. FEMA.14 (R)/2016-RB dated May 2, 2016 in the following
manner:
 a. Bank draft, pay order, banker's or personal cheques.
 b. Foreign currency notes/foreign currency travellers’ cheques from the buyer
during his visit to India.
 c. Payment out of funds held in the FCNR/NRE account maintained by the
buyer
 d. International Credit Cards of the buyer.

Case study - IV
 Investment in Real estate by NRI in India .
 Discuss the various alternative available to Mr. NRI in India to explore real
estate business/ Purchase and sale of Immovable property in India
 Discuss these opportunity in the back ground of various provision under
FEMA

Case study – IV
 Overview of legal provision:
 1. As per FDI POLICY 2016 FDI means - Investment by non-resident entity/person resident outside
India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management
(Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000
 2. As per schedule 4 of FEMA Notf.20 – a NRI including a company, a trust and a partnership firm
incorporated outside India and owned and controlled by non-resident Indians may purchase and
sale shares/Convertible debentures, warrants or units on Non- repatriation basis which will be
deemed to be domestic investment at par with the investment made by residents.
However, no purchase of shares or convertible debentures, etc of an Indian company shall be
made under this Scheme if the company concerned is a Nidhi company or is engaged in
agricultural/plantation activities or real estate business or construction of farm houses or dealing in
Transfer of Development Rights.
 Explanation: For the purpose of this paragraph, "Real estate business" means dealing in land and
immovable property with a view to earning profit therefrom and does not include development of
townships, construction of residential commercial premises, roads or bridges, educational
institutions, recreational facilities, city and regional level infrastructure, townships. Further, earning
of rent income on lease of the property, not amounting to transfer, will not amount to “real estate
business”. Investment in units of Real Estate Investment Trusts (REITs) registered and regulated
under the SEBI (REITs) regulations 2014 shall also be excluded from the definition of “real estate
business”

Case study – IV
 3.As per para 5.2.10 of FDI policy 2016 – 100% FDI under automatic route is allowed in Construction
Development projects (which would include development of townships, construction of
residential/commercial premises, roads or bridges, hotels, resorts, hospitals, educational institutions,
recreational facilities, city and regional level infrastructure, townships) subject to conditions specified
in the policy. Conditions relating to lock-in period of 3 years do not apply to investment by NRIs.
 4.Further as per Regulation 3 of Foreign Exchange Management (Acquisition and transfer of
Immovable property in India) – Notf.21
A person resident outside India who is a citizen of India may -
 a) acquire immovable property in India other than an agricultural property, plantation, or a farm
house:
 Provided that in case of acquisition of immovable property, payment of purchase price, if any, shall be
made out of (i) funds received in India through normal banking channels by way of inward remittance
from any place outside India or (ii) funds held in any non-resident account maintained in accordance
with the provisions of the Act and the regulations made by the Reserve Bank.
 Provided further that no payment of purchase price for acquisition of immovable property shall be
made either by traveller's cheque or by foreign currency notes or by other mode other than those
specifically permitted by this clause'.
 b) transfer any immovable property in India to a person resident in India.
 c) transfer any immovable property other than agricultural or plantation property or farm house to a
person resident outside India who is a citizen of India or to a person of Indian origin resident outside
India

Case study – IV
 Repatriation of sale proceeds
 In the event of sale of immovable property other than agricultural land/farm
house /plantation property in India by a person resident outside India who is a
citizen of India or a person of Indian origin, the authorised dealer may allow
repatriation of the sale proceeds outside India, provided the following
conditions are satisfied, namely:
 (i) the immovable property was acquired by the seller in accordance with the
provisions of the foreign exchange law in force at the time of acquisition by him
or the provisions of these Regulations;
 (ii) the amount to be repatriated does not exceed (a) the amount paid for
acquisition of the immovable property in foreign exchange received through
normal banking channels or out of funds held in Foreign Currency Non-Resident
Account or (b) the foreign currency equivalent, as on the date of payment, of
the amount paid where such payment was made from the funds held in Non-
Resident External account for acquisition of the property;
 (iii) in the case of residential property, the repatriation of sale proceeds is
restricted to not more than two such properties.

Case study – IV
 Summary of the provisions applicable to NRIs and PIOs under FEMA 21:
Particulars NRI PIO
Purchase (other than agricultural land/ farmhouse/
plantation etc) from
Resident/ NRI Resident/ NRI
Acquire as gift (other than agricultural land/ farmhouse/
plantation etc) from
Resident / NRI/ PIO Resident/ NRI/ PIO
Acquire (any IP) as inheritance from
(a) Any person who has acquired it under laws in force
(b) under section 6(5) of FEMA
Sell (other than agricultural land/ farmhouse/ plantation
etc) to
Resident / NRI/ PIO Resident
Sell (agricultural land) to Resident
Resident who is a citizen of
India
Gift (other than agricultural land) to Resident / NRI/ PIO Resident / NRI/ PIO
Gift (agricultural land) to Resident
Resident who is a citizen of
India
Gift residential/ commercial property to Resident / NRI/ PIO Resident / NRI/ PIO

Case study – V
 Investment outside India for co-production of the Film
 A U.K. company engaged in production of International film, proposed its next
production during F.Y. 2016-17 to be completed and released by 30th April 2017. The
film is budgeted at a cost of GBP 1mn which is partly (equally) financed by Indian co-
producer. On release of the film, Indian co-producer will have all the right in relation
to Indian territory and U.K. company will have world wide rights except that of India.
The film contemplates:-
 30% of shooting in India at a cost of GBP 1,00,000.
 50% of principal star cast from India for a consideration of GBP 2,00,000.
 Various pre productions & post production activities in U.K. at a cost of GBP
7,00,000 which includes payment to storywriter, choreography, supporting artists,
cameraman, production co-ordinator, technicians & directors.
 Indian co-producer is a company with paid up capital & reserves of equivalent to
GBP 1,00,000, contemplating the funding of its share of contribution of GBP 5,00,000
to part finance the film.
 Indian company is seeking immediate solution to finalise the structuring of the co-
production finance as it did not have time to approach RBI for prior approval if any,
kindly advise Indian company.

Case study – V
 Overview of legal framework
 Section 6(3)(a) of Foreign Exchange Management Act deals with "Transfer or issue of any
foreign security by a person resident in India". Regulation relating to this transaction is
notified by RBI as Notification No. 120 dt 7.7.2004.
 As per regulation 6 of FEMA Notification no. 120 an Indian party may make direct
investment in a Joint Venture or Wholly Owned Subsidiary outside India. According to
regulation 2(k) "Indian party" means a company incorporated in India or a body created
under an Act of Parliament or a partnership firm registered under the Indian Partnership
Act, 1932 or a Limited Liability Partnership (LLP) as defined under clause (ma) of Regulation
2 of this Notification making investment in a Joint Venture or Wholly Owned Subsidiary
abroad, and includes any other entity in India as may be notified by the Reserve Bank.
 Further as per regulation 6(2) The total financial commitment of the Indian Party in Joint
Ventures / Wholly Owned Subsidiaries shall not exceed 400%, or as amended by the
Reserve Bank from time to time, of the net worth of the Indian Party as on the date of the
last audited balance sheet and as per regulation 2(o) Net worth’ means paid up capital and
free reserves.
 Other conditions of regulation of 6(2)

Case study – V
 Regulation 6(6) deals with investment outside India in existing
company that is required to be valued by a Category I Merchant
Banker Registered with Securities and Exchange Board of India
(SEBI), or an Investment Banker/Merchant Banker outside India
registered with the appropriate regulatory authority in the host
country, where investment is more than USD 5 (Five) million; and
 (ii) in all other cases, by a Chartered Accountant or a Certified
Public Accountant.

Case study – V
 Conclusion
 Case(a)
 Thus, Indian party can invest upto 400% of net worth (i.e. capital and reserve) in JV or WOS
outside India without prior approval of RBI.
 In the given case Indian Party is Indian company and net worth of the company is GBP
1,00,000 and investment to be made is also GBP 5,00,000 (which is 500% of its net
worth).Thus it needs to take prior approval of RBI subject to condition specified in the
regulation i.e.
 (i) The direct investment is made in an overseas JV or WOS engaged in a bonafide business
activity.
 (ii) The Indian Party is not on the Reserve Bank’s Exporters caution list /list of defaulters to
the banking system circulated by the Reserve Bank or under investigation by any
investigation /enforcement agency or regulatory body.
 (iii) The Indian party has submitted its Annual Performance Report in respect of all its
overseas investments in the format given in Part II of the Form ODI
 (iv) The Indian Party routes all transactions relating to the investment in a Joint
Venture/Wholly Owned Subsidiary through only one branch of an authorised dealer to be
designated by it.
B. Further, valuation by CA of Foreign company will be required since it is an existing
company, which may take “considerable time”.

Case study - VI
Guarantee By PRII in favour Of Foreign Step Down Subsidiary
Background
 XYZ Limited (XYZ) is an Indian subsidiary of ABC Ltd. (ABC). ABC holds
74% stake in XYZ.
 LMN SA, Spain (‘LMN’) is a subsidiary of XYZ, where XYZ holds 77%. The
balance 23% is held by XYZ International PTE Ltd (XYZIIPL), Singapore
which is a wholly owned subsidiary of XYZ.
 AAA Bank India, had sanctioned a Euro 10 mn Non fund based (SBLC)
facility at the request of XYZ in favour of AAA Bank Spain, who in turn
had provided a Working capital facility of Euro 10 mn to LMN SA. The
said facility was secured by way of a corporate guarantee by ABC.
 Due to RBI raising certain objection to the above arrangement, AAA Bank
India has now sanctioned the Euro 10 mn Non fund based (SBLC) facility
directly to LMN, Spain.
 The said facility is to be secured by way of a letter of Comfort from XYZ &
a Corporate guarantee by ABC

Case study – VI
74%
100%
Indian subsidiary
77%
Outside India 23%
ABC
XYZ
LMN SA XYZIIPL

Case study – VI
Question for consideration
Based on discussions with the ABC, the clarification is sought
 A. Whether ABC can extend corporate guarantee for the
arrangement?
 If No, Can you suggest a minimal requirement to do so?
 B. Whether LMN is a first level step down subsidiary or a second
level step down subsidiary for Indian party that intends to issue
a corporate guarantee to AAA Bank, India for the purpose of
providing the facility for Euro 10mn to LMN?
 Leads: Notf. 8 on Guarantee
 Notf. 120 on overseas investment
 Definition of Indian Party

Case study – VI
 Overview of Legal framework on Guarantees:
 Issue of guarantees by a PRII is regulated by RBI under Foreign
Exchange Management (Guarantees) Regulations, 2000 issued
under Notification No. FEMA 8/2000-RB dated 3rd May 2000
('FEMA 8') as amended from time to time.
 Regulation 5(b) of FEMA 8 permits a company in India which is
promoter of a JV / WOS outside India to give a guarantee to or on
behalf of the JV / WOS in connection with its business subject to
the terms and conditions stipulated in Foreign Exchange
Management (Transfer or Issue of any Foreign Security)
Regulations, 2000.

Case study – VI
 Overseas Investments:
 Direct Investments outside India are regulated by RBI under Foreign
Exchange Management (Transfer or Issue of any Foreign Security)
Regulations, 2000 issued under Notification No. FEMA 120/2000-RB dated
7th July 2004 ('FEMA 120') as amended from time to time. The procedural
instructions are issued by the RBI vide A.P. (DIR Series) Circulars from
time to time. Various existing instructions are consolidated vide Master
Directions No. 15/2015-16 dated Jan. 01, 2016 on Direct Investments by
Residents in Joint Ventures and Wholly Owned Subsidiaries abroad.
 Relevant provisions regarding Financial Commitment under FEMA
120:
 Regulation 6 specifies the conditions for Overseas Direct investments
under the automatic route.
 In terms of Regulation 6(2) of the Notification, an Indian party has been
permitted to make total financial commitment in overseas Joint Ventures
(JV) / Wholly Owned Subsidiaries (WOS), not exceeding 400 per cent of
the net worth as on the date of its last audited balance sheet

Case study – VI
 Relevant provisions of the Master Direction: [Also Reg. 6(2)(i)]
 'Financial Commitment':
 As consolidated by the aforesaid Master Direction in its Para B.1 (3), for the purpose of
determining the 'total financial commitment' within the limit of 400% as specified above,
the following shall be reckoned, namely:
 100% of the amount of equity shares;
 100% of the amount of compulsorily and mandatorily convertible preference shares;
 100% of the amount of other preference shares;
 100% of the amount of loan;
 100% of the amount of guarantee (other than performance guarantee) issued by the
Indian party;
 100% of the amount of bank guarantee issued by a resident bank on behalf of JV or WOS
of the Indian party provided the bank guarantee is backed by a counter guarantee /
collateral by the Indian party.
 50% of the amount of performance guarantee issued by the Indian party provided that the
outflow on account of invocation of performance guarantee results in the breach of the
limit of the financial commitment in force, prior permission of the Reserve Bank is to be
obtained before executing remittance beyond the limit prescribed for the financial
commitment.

Case study – VI
 As provided in the Explanation to Regulation 6(3), an Indian Party may offer to a person
resident outside India any form of guarantees, that is, corporate or personal / primary or
collateral / guarantee by promoter company in India / guarantee by group company, sister
concern or associate company in India, provided that:
 a) total 'financial commitment' including all forms of guarantees remains within the overall
ceiling stipulated for overseas investment by an Indian Party and
 b) no guarantee is 'open ended‘
 Definition of Net worth:
 Net worth has been defined in Regulation 2(o) of the said Notification as paid-up capital and
free reserves.
 Indian Party has been defined in Regulation 2(k) as under:
 "Indian party" means a company incorporated in India or a body created under an Act of
Parliament or a partnership firm registered under the Indian Partnership Act, 1932 or a
Limited Liability Partnership (LLP) as defined under clause (ma) of Regulation 2 of this
Notification making investment in a Joint Venture or Wholly Owned Subsidiary abroad, and
includes any other entity in India as may be notified by the Reserve Bank;
 Provided that when more than one such company, body or entity make an investment in the
foreign entity, all such companies or bodies or entities shall together constitute the "Indian
party”.

Case study – VI
 Issue of Guarantee by Indian Party to step down subsidiary of JV / WOS:
 As provided in regulation6(4) of FEMA Notf. 120,(i) An Indian Party may
extend a loan or a guarantee to or on behalf of the Joint Venture /
Wholly Owned Subsidiary abroad, within the permissible financial
commitment, provided that the Indian Party has made investment by
way of contribution to the equity capital of the Joint Venture.
 Notwithstanding the above regulation, the following shall also be
permitted.
 (ii) An Indian Party may extend corporate guarantee on behalf
of its first generation step down operating company within the
prevailing limit for overseas direct investment.
 Explanation: Issue of corporate guarantee on behalf of second level or
subsequent level step down operating subsidiaries will be considered
under the Approval Route, provided the Indian Party indirectly holds 51
per cent or more stake in the overseas subsidiary for which such
guarantee is intended to be issued.”

Case study – VI
 Applicability to the case study:
 As provided in Regulation 2(k) of FEMA 120, when more than one Indian company, body or
entity make an investment in the foreign entity, all such companies or bodies or entities shall
together constitute the "Indian Party”. Accordingly, when more than one Indian company has
participated in the investment in a foreign entity, all such Indian companies jointly constitute
“Indian party”. If 100% ownership of the foreign entity is held by such multiple Indian
companies comprising the “Indian Party”, the foreign entity will be in the nature of a wholly-
owned subsidiary of the “Indian Party” and not a joint venture between the companies
comprised in the “Indian Party”. Thus FEMA does not seek to distinguish between the various
entities located within India or the group structure in India but is concerned with the
structure of the entities set up outside India. Under FEMA, the concept of JV / WOS and step
down entities refers only to foreign entities and not to a wholly owned subsidiary in India
which is part of the Indian Party.
 e.g. If Co. A is the holding company of Co. B in India and they both invest in a foreign entity
Co. C, then, keeping in view the definition of “Indian Party” both Co. A and Co. B shall be the
“Indian Party” and Co. C shall be its wholly-owned subsidiary abroad (‘WOS’). Since Co. C is
an WOS, it cannot be considered as first level step down subsidiary under FEMA even
though it is a step down subsidiary for Co. A as per company law.

Case study – VI
 In the instant case, XYZ, the Indian Party, is the holding company of LMN,
which it has promoted along with XYZIIPL. As LMN has direct investment
from XYZ, it is a JV / WOS of the Indian Party and not a first level step down
subsidiary. In case LMN had received entire investment from XYZIIPL, it
would have been construed as a first level step down subsidiary of XYZ.
However, given the shareholding pattern of LMN, there is no issue
whatsoever that it is a JV / WOS of Indian Party and not a first level or
second level step down subsidiary.
 As regards extending corporate guarantee on behalf of LMN, it would be
permissible under Regn. 6(2)(i)(c) of FEMA 120 within the financial
commitment of 400% of the net worth of the Indian Party. As this is a direct
case of Indian Party extending guarantee on behalf of its JV / WOS, it does
not fall under provisions regulation 6(4)(ii) of FEMA notf. 120 that is
applicable to first level and second level step down subsidiaries. Thus the
Indian Party can extend the said guarantee under Regn. 6(2)(i)(c) without
attracting the provisions relating to first or second level step down
subsidiaries.

Case study – VI
 Applicability to case study:
 Q. (a) Whether guarantee can be issued by ABC ltd.
 Ans. (a) Since ABC is an India party, guarantee can be extended by it.
However in view of the language used in the Notf. about who can
provide loan or guarantee, it is advisable to make a small investment
by ABC along with XYZ in to LMN ,in order to avoid any issue of
contravention in future

Case study – VI
 Q. (b) Whether LMN is a first level step down subsidiary or a second level
step down subsidiary for Indian party that intends to issue a corporate
guarantee to AAA Bank, India for the purpose of providing the facility for Euro
10mn to LMN?
 A. (b) As discussed in detail , LMN has received direct investment from the
Indian Party, it shall be regarded as an JV / WOS of such Indian Party and
not a step down subsidiary and guarantee can be extended under Regn.
6(2)(i)(c) of FEMA 120 within the limit of 400% of net worth without
attracting the provisions & restrictions relating to step down subsidiaries.
Further, even If LMN was an 100% subsidiary of XYZIIPL, only in that case
would it would be considered as 1st level step down subsidiary of the Indian
Party and guarantee could be extended by such Indian Party under the
automatic route as provided under regulation 6(4)(ii)of Notf. 120. Thus in no
case is LMN a second level subsidiary which would have necessitated RBI
approval for guarantee by Indian Party.

Case Study – VII -A
 A. ODI- Investment by Individual under Liberalised Remittance
Scheme
 Mr. A desires to make investment in shares of a foreign company.
He seeks guidance on the relevant provisions and routes available
to him under FEMA.
 Leads:
 Liberalised Remittance Scheme (LRS) under A.P.(Dir) Circular
No. 64 dt. 04.02.2004
 Overseas Direct Investment under Regn. 20A read with
Schedule V of FEMA Ntf. 120

 Overview of legal framework:
 Under LRS, resident individuals can freely remit up to USD 2,50,000 per Financial Year
(April-March) for any permitted current or capital account transaction or a combination
of both
 Permissible capital account transactions by an individual under LRS includes:
 making investments abroad - acquisition and holding shares of both listed and
unlisted overseas company or debt instruments; acquisition of ESOPs; investment in
units of Mutual Funds, Venture Capital Funds, unrated debt securities, promissory
notes;
 setting up Wholly Owned Subsidiaries and Joint Ventures (with effect from August
05, 2013) outside India for bonafide business subject to the terms & conditions
stipulated in Notification No FEMA.263/RB-2013 dated March 5, 2013 which
amended Notification No FEMA 120 relating to Overseas Direct Investments
 Under FEMA 120, "Direct investment outside India" means investment by way of
contribution to the capital or subscription to the Memorandum of Association of a
foreign entity or by way of purchase of existing shares of a foreign entity either by
market purchase or private placement or through stock exchange, but does not
include portfolio investment (emphasis applied)

 Discussions:
 From the definition of Direct investment outside India, it is evident that investment in the
nature of portfolio investment does not fall under the same and hence is outside the purview
of provisions specified in Ntf. FEMA 120
 The term ‘portfolio investments’ is not defined in FEMA or in any of its regulations. The
Advance Law Lexicon defines the term ‘portfolio investment’ as “the purchase of foreign
financial asset with the purpose of deriving returns from the security without intervening in
the management of the foreign operations”.
 Hence, in common parlance, portfolio investments may be considered as “hands-off”
investments which are made only with the intention to earn returns and do not include
control/ participation in decision making of an offshore entity by the resident individual.
 Therefore, the route available to Mr. A depends on whether his investment in foreign
company is for undertaking business with participation / control in decision making by him or
is “hands-off” i.e. in nature of portfolio investment.
 Issue arises as to whether investment in unlisted securities can be considered as portfolio
investment if it does not involve management participation or control because, as per
common parlance, only listed investments are generally considered as portfolio investments

 Discussions:
 The maximum amount of investment in foreign shares by resident individual is limited to the
LRS limit of US$ 250,000 whether through LRS or through ODI route
 If Mr. A’s case falls under ODI route, it is subject to conditions specified in Schedule V of
FEMA Ntf. 120. The following conditions are more restrictive in case of ODI by individual
compared to ODI by a company / registered partnership firm / LLP:
 The JV or WOS, to be acquired / set up by a resident individual under Schedule V, shall
be an operating entity only and no step down subsidiary is allowed to be acquired or set
up by the JV or WOS
 The financial commitment by a resident individual to / on behalf of the JV or WOS, other
than the overseas direct investments as defined under Regulation 2(e) read with
Regulation 20A of this Notification, is prohibited. As per said definition, investment is
permissible only by way of contribution to the capital or subscription to the Memorandum
of Association of a foreign entity or by way of purchase of existing shares of a foreign
entity; hence it may not be possible for Mr. A to grant loan to or issue guarantee on
behalf of his JV / WOS abroad
 In case an individual invests in JV / WOS along with Indian company as part of Indian
Party, issue arises whether the above mentioned restrictive provisions relating to step
down subsidiaries, loans & guarantees would apply to such ODI.

Case Study – VII -B
 ODI- Recognition of investment in Overseas subsidiary – FEMA 120
 A)ABC is a company incorporated under Indian Companies Act.
 XYZ is a company incorporated in Singapore on 1st October 2011.
 Upon incorporation 1 share of S$ 1, representing 100% capital of the
company was allotted to a resident of Singapore.
 The shares was transferred by resident shareholder to ABC Ltd. on 25th
October 2011 but yet no remittance has been made to resident
shareholder towards the purchase consideration.
Questions for consideration
 The queriest seeks clarification on recognition of investment in it's Books of
Accounts, made outside India by way of purchase, pending the payment of
consideration to the seller and compliance with the Foreign Exchange
Management Act (FEMA)

Case study – VII – B
 B.FEMA 120 - ODI- Recognition of investment in Overseas
subsidiary
 Investment in the securities of a company outside India is governed by
Notification No. FEMA 120/2004-RB dt. 07/07/2004
 According to sub regulation (vi) of Regulation 6, Indian Party may invest
outside India on filing of form ODI and related documents
 There is no obligation under FEMA to record the transaction of
investment outside India unless there is remittance from India or any
contractual obligation undertaken by the queriest.
Applicability to case study
 Under the provisions of FEMA there is no obligation on ABC to record the
investment in XYZ in its books until the remittance is made to shareholder
resident in Singapore or unless there is any commitment made by way of
any resolution or other wise as per the normal corporate governance norms
of the Indian Company

Case Study – VII -C
 C)A ltd. has Overseas Venture engaged into marketing of the products of A
Ltd. in the overseas territory. Number of payments are made by A Ltd. on
behalf of Overseas Venture in India and outside India. These are in the
nature of facility management, travelling, payments made on behalf of
overseas venture to its supplier/s, etc.
A ltd. has approached participants at CTC’s conference to advise them on
the nature of transaction and its validity under FEMA.
 A. Is it a loan transaction from A ltd. to Overseas Venture ?
 B. Is it a temporary advance?
 C.Is it Capital account or Current account transaction?
 Kindly discuss

Case study VII–C
 C. Overview of legal framework
 There are two type of transaction under FEMA, Current Account Transaction and Capital
Account Transaction.
 Capital Account transaction under FEMA is defined as under
As per Sec.2(e) of Foreign Exchange Management Act -capital account transaction" means a
transaction which alters the assets or liabilities, including contingent liabilities, outside India
of persons resident in India or assets or liabilities in India of persons resident outside India,
and includes transactions referred to in subsection (3) of section 6;
 Current Account transaction under FEMA is defined as under
As per Sec. 2(j) of Foreign Exchange Management Act - " current account transaction"
means a transaction other than a capital account transaction and without prejudice to the
generality of the foregoing such transaction includes,-
(i)payments due in connection with foreign trade, other current business, services, and
short- term banking and credit facilities in the ordinary course of business,
 (ii)payments due as interest on loans and as net income from investments,
 (iii)remittances for living expenses of parents, spouse and children residing abroad, and
 (iv)expenses in connection with foreign travel, education and medical care of parents,
spouse and children;

Case study VII - C
 C. Applicability to case study
It may be noted from the wording of Section 2(j)(i) as reproduced here that the
transactions of A Ltd. with its overseas venture may be covered as Current Account
transaction and therefore they may be settled periodically within 12 months time from time
to time.

Case study – VII -D
 D) Capitalisation of export proceeds
 A large export house (Ex group) has two distinct registration as a trading house with
DGFT (Director General of Foreign Trade) one as a company and another as a
proprietary business. Both the concern has huge outstanding export realisation from
various of its overseas customers. It faces problems of realising its export value in
time in accordance with the provisions of FEMA although its average realisation
period is lower than the stipulated period under FEMA. Ex group is considering the
proposal to incorporate wholly owned subsidiary to avoid the mismatch of realisables
without any remittance of cash from India.
Advise Ex-group as to -
 How it can accomplish this under FEMA and
 Whether proprietary business should consider the proposal or company be preferred
to incorporate WOS and why?
 Issue involved in annual reporting to Reserve Bank of India
 (b)(i)Is it possible for a firm of Chartered Accountant from India to capitalise its
foreign fees to incorporate WOS for its international business?
 Is it possible for the firm to incorporate joint venture in Mauritius, by capitalising fees
receivable from Chartered Accountant firm of U.K. with 10% stake?

Case study – VII -D
 Legal Framework: As per regulation 11 an Indian Party may make direct investment
outside India in accordance with the Regulations in Part I by way of capitalisation in full
or part of the amount due to the Indian Party from the foreign entity towards: -
 i. payment for export of plant, machinery, equipment and other goods/software to the
foreign entity;
 ii. fees, royalties, commissions or other entitlements due to the Indian Party from the
foreign entity for the supply of technical know-how, consultancy, managerial or other
services
 Provided that where the export proceeds have remained unrealised beyond the
prescribed period of realization from the date of export, and fees, royalties, commissions
or other entitlements of the Indian party have remained unrealised from the date on
which such payment is due, such proceeds shall not be capitalized without the prior
permission of the Reserve Bank.

Case study – VII - D
 As per regulation 19A, a proprietorship concern or an unregistered partnership firm in
India, satisfying the criteria for Overseas Direct Investment as prescribed by the
Reserve Bank from time to time, may set up / acquire a Joint Venture (JV) / Wholly
Owned Subsidiary (WOS) outside India with the prior approval of the Reserve Bank.
 The above amendment vide. Ntf. 325 dt. 12.11.2014 deleted the erstwhile Schedule
II which prescribed the criteria.

Capitalisation of foreign fees receivable to incorporate WOS
As per regulation 19 of FEMA Notf.120 proprietary concern in India may apply
to the Reserve Bank through the authorized dealer in Part I of the Form ODI for
permission to accept shares of a company outside India in lieu of fees due to it
for Professional services rendered to the said company.
 Provided that: -
 (a) the value of the shares accepted from each company outside India shall not
exceed fifty per cent of the fees receivable by the Indian concern from that
company; and,
 (b) the Indian concern’s shareholding in any one company outside India by
virtue of shares accepted as aforesaid shall not exceed ten per cent of the paid-
up capital of the company outside India, whose shares are accepted.

D.Applicability to case study :
In the given case Ex group, registered as trading house with DGFT is considering the proposal of
setting up WOS abroad as it is facing problem in realising its export proceeds and it wants to do the
same without any cash remittance from India. Further, it has two distinct registration as a trading
house with DGFT (Director General of Foreign Trade) one as a company and another as a proprietory
business.
 How it can accomplish its objective?
 Whether proprietory business should consider the proposal or company be preferred to incorporate
WOS and why?
 Ans. By virtue of Regulation 6(1) of Foreign Exchange Management (Transfer or issue of any foreign
security) an Indian party may make direct investment outside India in JV or WOS. Further regulation
6(2) discusses about financial commitment which shall not exceed 400% of the net worth of Indian
party. Regulation 6(3)discuss about modes of funding ,which amongst other includes capitalization of
export proceeds as per regulation 11.As per regulation 11 proceeds shall not be capitalized without
the prior permission of the Reserve Bank if have remained unrealised beyond the prescribed period
of realization.
 Thus, EX group can incorporate WOS by capitalising export proceeds by virtue of regulation 6 & 11
also it does not need to take prior approval from RBI as its average realisation period is lower than
the stipulated period under FEMA.
 For this company should be considered as in this case it does need to take RBI approval whereas in
case of proprietary business as per regulation 19A of Notf. 120 approval is required.

 Q.I Issue involved in annual reporting to Reserve Bank of India
APR to be filed every year on before the specified date in part III of form ODI.
(b)(i)Is it possible for a firm of Chartered Accountant from India to capitalise its foreign fees to incorporate
WOS for its international business?
ii)Is it possible for the firm to incorporate joint venture in Mauritius, by capitalising fees receivable from
Chartered Accountant firm of U.K. with 10% stake?
Ans. According to regulation 19 A proprietary concern in India may apply to the Reserve Bank through the
authorized dealer in Part I of the Form ODI for permission to accept shares of a company outside India in
lieu of fees due to it for professional services rendered to the said company subject to condition specified in
the said regulation.
i)Thus, a firm of Chartered Accountant from India can not capitalise its foreign fees to incorporate WOS for
its international business, but it can only acquire share of the company to which fees are due.
 ii) It is possible to establish JV in Mauritius by capitalising fees receivable from CA firm of U.K. as the
proviso clause of the regulation clearly states that
 (a) the value of the shares accepted from each company outside India shall not exceed fifty per cent of the
fees receivable by the Indian concern from that company; and,
 (b) the Indian concern’s shareholding in any one company outside India by virtue of shares accepted as
aforesaid shall not exceed ten per cent of the paid-up capital of the company outside India, whose shares are
accepted .
 It just need to make sure that value of share does not exceed 50% of the fees receivable.
(Note: The wordings are from each company in clause a and shareholding in any one co. outside India in clause
b )
95

Case study - VIII
 Opening of project office in India
 Background
 XYZ SA (Company) was incorporated in Spain in the year 1977. The Company’s
main business is Operation & Maintenance (O&M) of roads (highways and
expressways), railways, ports, airports, buildings and petrol pumps. It has also
diversified into other businesses such as engineering & consulting, research
laboratory, training & research, quality control, safety, health & environment,
designing of road signage and construction. ABC India Ltd. (ABC) has taken over
XYZ SA (the “Company”) in March 2016.
 XYZ S.A. has existing investments in some of the Indian companies for carrying
on activities related to development of infrastructure including a joint venture
with 26% participation in LMN India Limited, a Special Purpose Vehicle (SPV)
 It is proposed to open a Project Office of the XYZ SA in India to carryout the
operations and management work to be delegated by the Special Purpose
Vehicles

Case study – VIII
 Issues for consideration:
On the basis of the above facts following issues were raised :
 Whether any approval is required for establishment of project office or any
reporting is required to be made to RBI upon opening of the Project Office
 How the operations of the Project Office can be funded from Spain and in what
manner
 What type of bank account is required to be maintained by the Project office.
Whether the account can be maintained in Indian or foreign currency
 Are there any restrictions on the utilization of funds in India
 Is intermittent transfer of the contract fees received from time to time to XYZ SA,
Spain is allowed
 Can one Project office can accept several O&M contracts from different Project
SPVs of ABC. Can one foreign company have more than One Project Offices
 Is there any requirement for registration of the Project Office with the Registrar of
Companies

Case study – VIII
 Overview of legal framework:
Under Foreign Exchange Management Act, 1999 (FEMA)
 Reserve Bank of India has granted general approval to the foreign
companies to establish Project Offices in India, provided they have secured a
contract from an Indian company to execute a project in India, and
 the project is funded directly by inward remittance from abroad; or
 the project is funded by a bilateral or multilateral International Financing
Agency; or
 the project has been cleared by an appropriate authority; or
 a company or entity in India awarding the contract has been granted Term
Loan by a Public Financial Institution or a bank in India for the project.
However, if the above criteria are not met, the foreign entity has to
approach the Reserve Bank of India, Central Office, for approval of each
project in India.

Case study – VIII
 AD Category – I banks can open non-interest bearing Foreign Currency Account for Project
Offices in India subject to the following:
 The Project Office has been established in India, with the general / specific permission of
Reserve Bank, having the requisite approval from the concerned Project Sanctioning
Authority concerned.
 The contract, under which the project has been sanctioned, specifically provides for
payment in foreign currency.
 Each Project Office can open two Foreign Currency Accounts, usually one denominated in
USD and other in home currency, provided both are maintained with the same AD
category–I bank.
 The permissible debits to the account shall be payment of project related expenditure and
credits shall be foreign currency receipts from the Project Sanctioning Authority, and
remittances from parent / group company abroad or bilateral / multilateral international
financing agency.
 The responsibility of ensuring that only the approved debits and credits are allowed in the
Foreign Currency Account shall rest solely with the branch concerned of the AD. Further,
the Accounts shall be subject to 100 per cent scrutiny by the Concurrent Auditor of the
respective AD banks.
 The Foreign Currency accounts have to be closed at the completion of the Project.

Case study – VIII
AD Category – I bank can permit intermittent remittances by Project
Offices pending winding up / completion of the project provided they are
satisfied with the bonafides of the transaction, subject to the following:
 The Project Office submits an Auditors' / Chartered Accountants’
Certificate to the effect that sufficient provisions have been made to
meet the liabilities in India including Income Tax, etc.
 An undertaking from the Project Office that the remittance will not,
in any way, affect the completion of the Project in India and that any
shortfall of funds for meeting any liability in India will be met by
inward remittance from abroad.
 Inter-Project transfer of funds requires prior permission of the Regional
Office concerned of the Reserve Bank under whose jurisdiction the Project
Office is situated.

Case study – VIII
 Thus it may be noticed that, in case of Project in India,
 PO cannot lend any money to any person in India.
 PO cannot undertake any activity other than execution of project. In a
case where LMN has established an SPV, it must award a project to
XYZ S.A., merely activity of operation and management work delegated
by SPV, may not qualify as project.
 PO cannot transfer funds inter-se projects without RBI permission.
 Each project to have separate Bank account and project office.
 Banks are allowed to open INR accounts and two foreign currency bank
accounts, subject to terms and conditions as per RBI /2008-09/109
A.P. (DIR Series) Circular No. 2 dated July 31, 2008. i.e. both the
accounts should be with one authorised dealer only and one account
can be in USD and other can be in home currency.
 As per Circular No.3 dated 6th July, 2002, PO is permitted to open term
deposit account for period not exceeding 6 months with any Bank, out
of temporary surplus funds.
 Prior Approval of RBI is required to hold foreign currency or coins.

Case study – VIII
 Applicability to case study :
 General permission is available for foreign companies to establish POs in India. If the
conditions of General Permission are not complied with, a prior approval be obtained
from Central Office of RBI.
 The establishment of PO is permitted under automatic route if the general conditions
mentioned are complied with, irrespective of the fact that foreign company has joint
venture in India. However it should be noted that the project must be of the
foreign company and it should be accorded by Indian company. In this case SPV
established by LMN may award a project to XYZ S.A.
 POs set up under general permission should furnish a report through the concerned AD
to RBI, within 2 months of establishment of PO incorporating certain details and an
undertaking that the PO is eligible to avail of the General Permission.
 The operations of the PO can be funded by inward remittance from Parent company in
Spain
 Each PO can maintain bank accounts in Indian currency and two bank accounts in
foreign currency, one in US Dollars and other in home currency. However both the
foreign currency accounts should be with the same AD

Case study – VIII
 Only project related payments can be made out of the bank account of PO
 Intermittent remittance can be made by PO to parent company on submission of
documents.
 One project office can undertake many projects. However the bank and project accounts
of each project should be separate and intimation should be filed with RBI within two
months of undertaking the new project.
 Upon intimation to RBI, PO is required to be registered with ROC
 POs are required to maintain audited accounts and annually submit reports and
certificates to ROC and RBI,.
 The project may be wound up and surplus proceeds may be remitted to parent company
outside India on production of documents as discussed earlier.

Case study- IX
 Invocation of pledge of promoter's shares
 XYZ India Ltd. ("XYZ") was incorporated in April 2009 by 4 promoters of which 3
are Non-Residents. In Oct. 2010, ABC Ltd. ("ABC") acquired 51% of equity capital
of XYZ. XYZ has availed loans from ABC through various Loan Agreements. The
Promoters have pledged the shares held by them in the capital of XYZ to ABC as
Collateral under the Loan Agreements. The Non-Resident promoters have taken an
approval from RBI in Oct. 2010 for permission to pledge their share holding in XYZ
to ABC under the initial Loan Agreement of Aug. 2010 of Rs. 50 mn.
As XYZ is in default under the Loan Agreement, ABC intends to acquire the said
share holding by way of invocation of pledge
Questions for consideration
 What are the implications for invocation of pledge under FEMA?
 What are the procedures and documentation under FEMA to be observed for the
purpose?
 Is there any implication under FEMA regarding the share transfer fees?

Case study – IX
 Pledge of Shares and Invocation thereof:-
 Over view of Legal Framework – para 7 of Annx.4 of consolidated FDI policy
provides that:
 Pledge of Shares
 a) A person being a promoter of a company registered in India (borrowing
company), which has raised external commercial borrowings, may pledge the
shares of the borrowing company or that of its associate resident companies for
the purpose of securing the ECB raised by the borrowing company, provided that a
no objection for the same is obtained from a bank which is an authorised dealer.
The authorized dealer, shall issue the no objection for such a pledge after having
satisfied itself that the external commercial borrowing is in line with the extant
FEMA regulations for ECBs and that :
 i) the loan agreement has been signed by both the lender and the borrower,
 ii) there exists a security clause in the Loan Agreement requiring the borrower to
create charge on financial securities, and
 iii) the borrower has obtained Loan Registration Number (LRN) from the Reserve
Bank:

Case study – IX
 and the said pledge would be subject to the following conditions :
 i) the period of such pledge shall be co-terminus with the maturity of the underlying ECB;
 ii) in case of invocation of pledge, transfer shall be in accordance with the extant FDI
Policy and directions issued by the Reserve Bank;
 iii) the Statutory Auditor has certified that the borrowing company will be utilized / has
utilized the proceeds of the ECB for the permitted end use/s only.
 b) Non-resident holding shares of an Indian company, can pledge these shares in favour of
the AD bank in India to secure credit facilities being extended to the resident investee
company for bonafide business purpose, subject to the following conditions:
 i. in case of invocation of pledge, transfer of shares should be in accordance with the FDI
policy in vogue at the time of creation of pledge;
 ii. submission of a declaration/ annual certificate from the statutory auditor of the investee
company that the loan proceeds will be / have been utilized for the declared purpose;
 iii. the Indian company has to follow the relevant SEBI disclosure norms; and
 iv. pledge of shares in favour of the lender (bank) would be subject to Section 19 of the
Banking Regulation Act, 1949.

Case study – IX
 c) Non-resident holding shares of an Indian company, can pledge these shares in favour of an
overseas bank to secure the credit facilities being extended to the non-resident investor / non-
resident promoter of the Indian company or its overseas group company, subject to the
following :
I. loan is availed of only from an overseas bank;
II. loan is utilized for genuine business purposes overseas and not for any investments either
directly or indirectly in India;
III. overseas investment should not result in any capital inflow into India;
IV. in case of invocation of pledge, transfer should be in accordance with the FDI policy in vogue at
the time of creation of pledge; and
V. submission of a declaration/ annual certificate from a Chartered Accountant/ Certified Public
Accountant of the non-resident borrower that the loan proceeds will be / have been utilized for
the declared purpose.
 In the instant case, XYZ has taken approval of RBI in October 2010 for availing local loans against
pledge of its shares held by its three US-based Non-Resident shareholders as security for loan granted
by ABC to XYZ.
 In case of invocation of pledge, transfer would be considered in accordance with the FDI policy in
vogue at the time of pledge.
 Definition of Transfer: As per Section 2 (ze) of the FEMA Act: "transfer includes sale, purchase,
exchange, mortgage, pledge, gift, loan or any other form of transfer of right, title, possession or
lien".

Case study – IX
 Valuation of shares in case of Transfer: In case of transfer of existing shares by a
Non-Resident to a Resident, Regulation 10B(2) provides for transfer under automatic
route subject to the concerned parties adhering to pricing guidelines, documentation
and reporting requirements for such transfers as may be specified by Reserve Bank,
from time to time. Pricing guidelines are stipulated in A.P. (Dir.) Circular No. 4 dated
July 15, 2014 where under, in case the shares of an Indian company are not listed on
a recognized stock exchange in India, the transfer of shares shall be at a price not
more than the minimum price at which the transfer of shares can be made from a
resident to a non-resident. Such minimum price stipulated is the fair value which is to
be determined, and certified by a SEBI registered Category–I Merchant Banker or a
Chartered Accountant, as per any internationally accepted pricing methodology for
valuation of shares on arm’s length basis.
 From the above definition of transfer, it is clear that transfer includes pledge and thus
at the very instance of creation of pledge, the shares are deemed to have been
transferred. It can also be inferred from the stipulation in RBI's approval (i.e. transfer
would be as per FDI policy in vogue at the time of pledge) that the shares are
deemed to be transferred at the time of the pledge.

Case study – IX
 Accordingly, there are no fresh implications under FEMA at the time of
default and invocation of pledge. As RBI has approved the pledge, it can be
concluded that various stipulations that are applicable under FEMA to
transfer of shares have been complied with including the valuation
requirements at the time of creation of pledge.
 The issue of filing of Form FC-TRS at the time of creation of pledge does not
arise as there was no actual transfer of ownership of shares and the
recording thereof in the books of XYZ. Hence, the issue of delay in filing of
the said form is not relevant at the time of creation of pledge.
 Documentation requirements under FEMA:
 The requirements towards documentation & procedures applicable to
transfer of shares in an Indian Company which has received FDI are
specified in Annexure 3 to the Consolidated FDI Policy as well as RBI's
Master Circular on Foreign Investments in India dated July 1, 2015.
 However, in the instant case, as transfer had taken place at time of creation
of pledge itself, it may be inferred that these documentation requirements
(FC-TRS)are not applicable at the time of invocation of pledge.

Case study – IX
 Nevertheless, there would be a change in the share holders of XYZ and it would be required
to register the transfer of shares in favour of ABC in the records of XYZ.. Accordingly, Form
FC-TRS would be required for the purpose. As the invocation involves transfer of shares from
non-resident to resident, the Form FC-TRS has to be signed by the non-resident. Further, in
the said Form, the consideration for transfer would be the value of the original loan against
which the shares are being acquired through invocation of pledge. As regards valuation of
shares, it would be a safe presumption that the aggregate value for all the shares at the time
of creation of pledge was higher than the amount of the loan. However, in case the current
outstanding loan, including accrued interest, is higher than the original value of the shares, it
would amount to extra consideration being paid for the shares which would be contrary to the
RBI approval granted for creation of pledge.
 The Form FC-TRS should be filed within 60 days of the date of invocation of the pledge and in
case the pledge has not yet been invoked, you may accordingly take a decision on the due
date of invocation.
 In case duly signed Form FC-TRS is not available, it would be necessary to seek RBI approval
to acquire and transfer the said shares.
 Share Transfer Fees & FEMA:
 As per general practice, share transfer fees are borne by the acquirer of shares. In case ABC
bears the same, no remittance of foreign currency is involved and hence there is no
implication under FEMA.

Case study –IX
 Q. (a) What are the implications for invocation of pledge under FEMA?
 A. (a) As discussed in detail, in terms of Section 2(ze) of FEMA Act, transfer includes
pledge. Thus, at the very instance of creation of pledge with RBI approval, the
shares are deemed to have been transferred. Hence, on invoking the pledge and
transferring the shares to ABC, there is no fresh implication under FEMA. However,
procedure to transfer the shares in XYZ's records has to be observed.
 Q. (b) What are the procedures and documentation under FEMA to be observed for
the purpose?
 A. (b) As discussed, to enable XYZ to effect actual transfer of the shares to ABC in its
records, Form FC-TRS duly signed by the non-resident would be required. In case it
is not available, it would be necessary to seek RBI approval to acquire and transfer
the said shares.
 Q. (c) Is there any implication under FEMA regarding the share transfer fees?
 A. (c) As discussed, there is no implication under FEMA as no remittance of foreign
currency is involved in case ABC bears the share transfer fees.

Case study - X
 Acquisition of Immovable property
 An Indian citizen resident in Iran gets immovable property in
India by way of inheritance from his parents resident in India.
 Can he hold such property?
 What if above property is agricultural land?
 Can he carry out agricultural activities?

Case study X
 Overview of legal framework
 As per sec. 6(5) of Foreign Exchange Management Act - A person resident
outside India may hold, own, transfer or invest in Indian currency, security or
any immovable property situated in India if such currency, security or property
was acquired, held or owned by such person when he was resident in India or
inherited from a person who was resident in India
 According to regulation 7 of Foreign Exchange Management (Acquisition and
transfer or immovable property in India) - No person being a citizen of Pakistan,
Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Macau or Hong
Kong without prior permission of the Reserve Bank shall acquire or transfer
immovable property in India, other than lease, not exceeding five years. (Notf
21)
 Reg 3…A person Resident out side India who is citizen of India…
a)acquire………….other than Agricultural/plantations/farm house and
b)transfer any immovable property in India to a PRII.
c)transfer any immovable property other than Agricultural….to a PROI who is
citizen of India or to a PIO resident outside India.(Notf 21)

Case study X
 Question of the India Citizen:
 Sec 6(4) permits inheritance from Resident Indian. Notification
prohibits it - what will prevail?
 Normally inheritance is a Right under other Law, Can FEMA override
such a law?
 Answer could be yes for all three questions, However India citizen may
approach RBI for the clarity.

Case study – XI
 Borrowings by Indian company from Non resident promoter
Background
XYZ India Pvt. Ltd. ('XYZ') is a 74:26 joint venture between the ABC
World Group and Indian entrepreneurs. XYZ India seeks to borrow funds
from its non-resident promoters / majority shareholder including NRIs and
use the same to make repayment to group companies. Dilution or change
in shareholding pattern of XYZ India is not acceptable in the immediate
future.
 Questions for consideration
 Whether there are any issues under FEMA with regard to borrowing funds
from non-resident promoter / majority shareholder in order to make
repayment to group companies
 Whether there are any other options / methods for raising funds from non-
resident promoters in a manner that does not lead to dilution of the equity
shareholding of Indian promoters

Case study – XI
 Overview of legal provision
 Borrowings in foreign exchange by persons resident in India from non-residents attract the provisions
stipulated in Foreign Exchange Management (Borrowing or Lending in Foreign Exchange) Regulations,
2000 issued under Notification No. FEMA 3/2000-RB dated 3rd May 2000 as amended from time to
time.
 As per Para 6(1) of FEMA 3, such foreign currency loans are permitted under the Automatic Route
Scheme subject to the terms & conditions specified in Schedule I to FEMA 3.
 Schedule I stipulates various requirements on such external borrowings with regard to eligibility of
borrowers, quantum of loans, type of permissible lenders, end-use purpose, interest rate, maturity,
security, etc.
 Further, such borrowings are permitted, inter alia, for investment (such as import of capital goods, new
projects, modernisation/expansion) in real sector - industrial sector. However, it is specifically stipulates
that borrowings shall not be utilised for on-lending, investments in stock market & real estate business
and repayment of Rupee Loans.
 In view of the above, as XYZ India's fund requirement for repayment to its group companies is in the
nature of on-lending for repayment of rupee loans, it would not be permissible to borrow funds from
non-resident promoters.
 As per the revised ECB framework in terms of Cir. 32 dt. 30.11.2015, ECB proceeds can be used for
general corporate purpose (including working capital) provided the ECB is raised from the direct /
indirect equity holder or from a group company for a minimum average maturity of 5 years.

Case study – XI
 Schedule II of FEMA 3 deals with borrowings in foreign currency under the Approval
route and is applicable to borrowings other than under the Automatic route. Schedule II
also specifies various requirements on eligibility, permissible lenders, end-use purpose,
etc. Here too, borrowings for repayment of rupee loans is not permitted. However, an
attempt may be made by way of application to RBI under Para 2 of Schedule II giving
specific, comprehensive reasons that have necessitated borrowing from non-resident
promoters and making out a convincing case as the end-use purpose is not in line with
the stipulations.
 Schedule III of FEMA 3 deals with Trade Credits not exceeding USD 20 million per
import transaction. Such Trade Credits can be availed of, inter alia, from overseas
supplier for import of items permissible under the Foreign Trade Policy ('FTP') with a
maturity period of one year from date of shipment. Whether logistics services to
shipping industry, such as those provided by XYZ India, fall under items permissible for
import under FTP is a debatable issue and it could be explored by way of an application
to RBI. However, even if permissible, it would be available only at the stage of import
and not to overdues as is currently the situation with XYZ India's payments to group
companies. Hence, the route of availing Trade Credits from overseas suppliers for
making repayment to group companies is not feasible for current overdue payments.

Case study – XI
 Borrowing in Rupees from NRIs can be considered as per Reg. 5, in respect
of NCD or schedule 7 in respect of public deposit scheme without any limit
subject to new regulations.
 In lieu of borrowings from non-resident promoters, funds may be raised by
way of issue of shares or convertible debentures in accordance with the
Foreign Direct Investment Scheme specified in Schedule I to FEMA 20/2000-
RB dated 3rd May 2000 as amended from time to time. As issue of equity
capital would result in dilution in shareholding of Indian promoters,
compulsorily convertible debentures ("CCDs") may be issued. These CCDs
could be convertible into a different class of equity shares with differential
voting rights so as to not result in any significant dilution. Issue of shares
with differential voting rights is permissible under section 43 of the
Companies Act, 2013 read with the Companies (Share Capital and
Debentures) Rules, 2014.

Case study – XI
 Applicability to case study
 The questions raised by XYZ India may therefore be replied as under:
 Q. (a) Whether there are any issues under FEMA with regard to borrowing
funds from non-resident promoter / majority shareholder in order to make
repayment to group companies
 A. (a) Borrowings from non-residents for purposes other than capital
investment such as repayment of rupee loans is specifically prohibited. As XYZ
India's end-use purpose is for repayment to group companies, borrowings
from non-resident promoters / majority shareholder is not permissible under
the Automatic Route.
However, an application may be made to RBI under the Approval route under
Schedule II to FEMA 3 clearly enumerating the reasons necessitating such
borrowings that are otherwise not permissible.
As regards Trade Credits from overseas suppliers, its permissibility for import
of services is debatable. Even if permitted, Trade Credit can be availed only at
the time of import and not for overdue payments. Further XYZ can also
explore rupee Loan provided from NRI/PIO promoters where end use do not
prohibit the repayment of Loan/dues.

Case study – XI
 Q. (b) Whether there are any other options / methods for raising
funds from non-resident promoters in a manner that does not
lead to dilution of the equity shareholding of Indian promoters
 A. (b) Compulsorily Convertible Debentures may be issued that
are convertible into a different class of equity shares with
differential voting rights as this method would not lead to any
signification dilution in shareholding in near future of Indian
promoters.

Case study – XII
 Investor from USA desires to participate in the Indian venture fund
industry. What are the routes available to it under FEMA?
 Leads:
 FDI Policy, Schedules 1, 2/2A, 6 & 11 to FEMA Ntf. 20
 SEBI (Alternative Investment Funds) Regn., 2012
 Overview of legal framework under FEMA:
Prominent investment routes for the offshore fund / investor are as follows:
 i. Foreign Direct Investments (FDI); (Regulation 5(1) and Schedule 1 of FEMA
20)
 ii.Foreign Portfolio Investment route for SEBI registered Foreign Portfolio
Investors (FPI); (Regulation 5(2A) and Schedule 2A of FEMA 20)
 iii. Foreign Venture Capital Investment route for SEBI registered Foreign
Venture Capital Investors (FVCI); (Regulation 5(5) and Schedule 6 of FEMA
20)
 iv. Investment by Persons resident outside India (“PROI”) in an Investment
Vehicle (Regulation 5(10) and Schedule 11 of FEMA 20)

Case study – XII
 Overview of legal framework:
 In 2012, SEBI took steps to completely overhaul the regulatory framework for
domestic funds in India and introduced the Securities and Exchange Board of
India (Alternative Investment Funds) Regulations, 2012 (“AIF Regulations”).
 AIF means any fund established in India in the form of a trust, company, limited
liability partnership or a body corporate which is a privately pooled investment
vehicle that collects funds from investors, whether Indian or foreign, for investing
it in accordance with a defined investment policy for the benefit of its investors but
is not a Mutual Fund or a Collective Investment Scheme as per SEBI Regulations
 SEBI has classified AIF into the following broad categories into which investors,
both domestic and foreign, may invest:
 Category I AIF: start-ups, early stage ventures, venture capital funds, SME
funds, social venture funds, infrastructure funds
 Category II AIF: Funds which cannot be categorized as Category I or Category
III AIF viz. Private Equity funds, Debt funds which do not undertake any
leverage or borrowings
 Category III AIF: Funds that employ diverse or complex trading strategies and
may employ leverage viz. Hedge funds

Case study – XII
 Key aspects of inbound regulations under FEMA Ntf. 20 for above routes:
 Under the FDI route, investment by PROIs can be made in Indian companies
(Schedule I) or in LLPs (Schedule 9). However, most of the domestic pooling
structures (AIF) has evolved in the form of Trust due to the operational flexibility.
Under the FDI regime, foreign investment into trust is subject to the FIPB
approval. Further, the repatriation of investment proceeds from AIF to the
Offshore Fund / investor may also require the RBI approval.
 Foreign investment into LLP is not permitted to FVCI, RFPI, FII, etc. Therefore,
foreign investment by such entities into domestic fund which is formed as LLP may
not be workable option.
 Foreign investment into an Indian company, engaged only in the activity of
investing in the capital of other Indian companies also require prior FIPB approval
 In view of the above, given the customization requirements of investments in
alternative funds and stringent rules regulating the relationship between the
investee company and the foreign investor, the FDI route may not work out as an
optimal method.

Case study – XII
 Under the Registered Foreign Portfolio Investor route (Schedule 2A): The Offshore
Fund that qualifies for registration as Category I, II or III FPI under SEBI (FPI)
Regn. 2014 can invest under RFPI route of Schedule 2A of FEMA Ntf. 20.
 As per the SEBI (FPI) Regn. and the FAQs issued by SEBI, FPI can invest only in
listed or to be listed shares or debentures of the companies. Accordingly,
investment in unlisted shares and debenture (other than debenture issued by
Infrastructure Company) would not be permissible.
 Hence, the Offshore Fund may choose to invest under the RFPI route only where
the investment is in listed company for stake up to 10% and / or there are
regulatory hurdles for investment under the FDI route such as sectorial restriction
e.g. Retail trading where conditionalities of local sourcing apply; Construction
activities where lock-in conditions of three years apply; NBFCs where conditions of
minimum capitalization apply, etc.

Case study – XII
 Under the Foreign Venture Capital Investment (‘FVCI’) route (Schedule 6): The
Offshore Fund that qualifies for registration under SEBI (Foreign Venture Capital
Investors) Regn. 2000 can invest under the FVCI route specified in Schedule 6 of
FEMA Ntf. 20.
 Accordingly, a FVCI registered under SEBI (FVCI)) Regn. may purchase:
 equity or equity linked instruments or debt instruments, issued by an Indian
company engaged in any sector mentioned at Annex to the Schedule 6 and
whose shares are not listed on a recognised stock exchange at the time of
issue of the said securities / instruments;
 equity or equity linked instruments or debt instruments issued by a startup,
irrespective of the sector in which it is engaged;
 units of a Venture Capital Fund (VCF) or of a Category I Alternative
Investment Fund (Cat-I AIF) or units of a scheme or of a fund set up by a VCF
or by a Cat-I AIF

Case study – XII
FVCI route (con’t) -
 List of sectors in which a Foreign Venture Capital Investor is allowed to invest:
 Biotechnology
 IT related to hardware and software development
 Nanotechnology
 Seed research and development
 Research and development of new chemical entities in pharmaceutical sector
 Dairy industry
 Poultry industry
 Production of bio-fuels
 Hotel-cum-convention centres with seating capacity of more than three
thousand.
 Infrastructure sector. (This will include activities included within the scope of
the definition of infrastructure under the External Commercial Borrowing
guidelines / policies notified under the extant FEMA Regulations as amended
from time to time)

Case study – XII
FVCI route (con’t) –
 FVCIs enjoy certain regulatory advantage over FDI route as mentioned below:
 The pricing norms applicable to FDI route do not apply to FVCIs. Accordingly,
FVCI can subscribe, purchase or sell securities at any price subject to other
applicable law.
 Apart from investment into Equity, CCPS and CCD, FVCI can also invest into
optionally convertible redeemable preference shares (OCRPS) and optionally
convertible debentures (OCDs).
 Possible to invest in debt securities such as non-convertible debentures. ECB
norms should not apply for investment in debt / optionally convertible
instruments
 One year lock-in applicable to shares (under the SEBI ICDS Regulations) do
not apply to shares held by FVCI if shares are held for at least one year before
IPO. This enables FVCI to exit immediately post listing.
 The transfer of listed shares from FVCIs to promoters is exempt from public
offer provisions under the SEBI takeover regulations.

Case study – XII
 Under newly introduced Schedule 11 of FEMA Ntf 20, RFPIs & NRIs can invest in
units of an ‘Investment Vehicle’ under the automatic route
 “Investment vehicle” means an entity registered and regulated under the relevant
regulations framed by SEBI or any other authority designated for the purpose and
shall include Real Estate Investment Trusts (“REIT”) governed by the SEBI (REITs)
Regulations, 2014, Infrastructure Investment Trusts (“InvIts”) governed by the
SEBI (InvIts) Regulations, 2014 and Alternative Investment Funds governed by the
SEBI (AIFs) Regulations, 2012
 Downstream investment by an AIF is classified as foreign investment if neither the
Sponsor nor the Manager nor the Investment Manager is Indian ‘owned and
controlled’ as defined in Regulation 14 of the principal Regulations. Prior to the
amendment, foreign investments in AIFs required a specific approval from the
FIPB and the downstream investments by such AIFs were also governed by the
FDI Policy.
 Downstream investment by an Investment Vehicle that is reckoned as foreign
investment shall have to conform to the sectoral caps and conditions / restrictions,
if any, as applicable to the company in which the downstream investment is made
as per the FDI Policy or Schedule 1 of the principal Regulations.
128

Case study – XII
 Thus, a foreign offshore fund has a number of alternatives available to it when
seeking to invest in India. Its eligibility under a particular route and the benefits or
restrictions depends on a number of factors such as the nature of the investor
(whether FPI Category I, II or III), the nature of the investment (listed / unlisted
or in AIF), the legal structure of the investee (company, trust, LLP), instrument
used for entry (equity, CCDs, NCD, Units of AIF), etc.
 It may be noted that now with new Schedule 11 on Investment Vehicles, NRIs
have more than one route to invest into listed equity and debt instruments namely
Schedule 3 for listed equity and Schedule 11 for both the instruments except
indirectly through mutual funds under schedule 5. It should also be noted that it is
not possible for any of the categories of FPI to register NRIs as overseas client
including as OCBs.
129

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Presentation of fema case study oct 2016 21.10.2016

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